The Most Unlikely of Outcomes

With Hillary Clinton ahead in nearly every poll (despite the FBI probes), it looked like she would win the election with little difficulty. Republicans were worried about losing the Senate and possibly the House. And big pharma and biotech investors were chewing the Xanax like they were M&Ms. But more often than not, political events and financial markets make a mockery of the pundits, and predictions are laid to waste. The Republican sweep will go down in history as one of the biggest upsets in all of politics.

Even Proposition 61, which had huge support according to polling data a month ago… LOST. At 10:00 pm on Election Day, the markets began to worry about a possible Trump victory and in overnight trading, the Dow Jones Industrial futures contract at the CME dropped over 800 points. And then Ohio and Florida turned Trump, and everyone held their breath. And when it was all over, Trump, despite being outspent and having the huge Clinton/Obama machine against him, won the election. The markets rallied in the morning hours and closed several hundred points higher, followed by more spirited rally action during the rest of the week, taking the Dow to new highs. A couple of the ISAW personal portfolio stocks lagged or declined, but the majority were pushed higher in the rally, after the market realized that a totally Republican House, Senate and Executive Branch would be less adverse to certain subsectors in healthcare.

Biotech had a particularly strong showing: Regeneron rallied from under $370 to nearly $420 a share. The Nasdaq Biotech ETF (ticker IBB) advanced from $265 to $288 a share. Illumina, however, treaded water for most of the week, as did Medtronic, Service Corporation International, and Medtronic. JNJ and Merck both rose not only due to election results, but also got a push from the defeat of Proposition 61 in California. A yes vote might have carried some serious adverse impact on big pharma and biotech.

With the election out of the way now though, all stocks will now have to move ahead on their own merit. Fundamentals will return. Although political cross winds will always be present, the major ones are hopefully behind us for now. While Trump and Republicans might want to dismantle all of the ACA, it is likely some of the law will be kept intact. Furthermore, if you were in fact going to repeal all of it, what would you replace it with? You can’t enact a major entitlement and then rip it away from Americans without replacing it with something beneficial. These issues lead to many unanswered questions that we will analyze for our readers going forward.

In the future, regulation and reimbursement pressures will remain and will only strengthen. Medicare, at some point, will not be able to continue to pay huge amounts for medical procedures and drugs, and the system will fall into more severe financial stress than it has now. As we mentioned in an earlier blog post, there are some clouds on the horizon for some subsectors in healthcare. The area that has suffered the most, despite a decent bump up this week, is the entire pharmaceutical distribution/retail sector. CVS, McKesson, Walgreens/Boots Alliance, and AmerisourceBergen have sold off substantially and are well below 52 week highs. We will be looking at these stocks very carefully to see if the weakness is temporary or the beginning of a more serious secular decline. If we deem the weakness to be temporary, we will either establish new positions in the ISAW personal portfolio or we’ll be looking at selling put options on those that we’d like to own, but own at a lower price. The premium collected will be an “extra dividend” that we’d get to keep… no matter which way the stock goes.

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