With the 2016 election, only a few days away, much has been written on the topic of how the outcome will affect the financial markets. More importantly, at least to our audience, how will the outcome influence the healthcare sector? In previous blogs, we have addressed various scenarios (see October 23rd blog on The Hillary Effect—Side Effects) and how they may play out in stock prices of big pharma and biotechnology. Should the worst-case scenario occur (Hillary wins, Democrats gain control of both the Senate and the House, as well Prop 61 passing in California), drug stocks and biotech might have a rocky road ahead as the Democrats will press hard to enact legislation to control drug pricing.
Concerned readers, as well as other individuals, have expressed concern over this possibility and asked what their options might be. I have outlined a few of them below. You would have all of Monday and part of Tuesday to enact these strategies as the polls will be open long after the stock market closes. Some firms allow after-hours trading as well, and you might be able to trade after the 3:00 NYSE close on Tuesday evening, as results are tallied.
- Reduce big pharma/biotech exposure. If you own a heavy concentration of big pharma or Biotech (Merck, Pfizer, Bristol Myers, and any biotech firm), then lighten up. The In Sickness and Wealth personal portfolio owns a little Merck and some biotech, but the exposure is under-weighted. We tend to be invested in areas that are relatively immune to the outcome of the election. True, the market overall, may take a dive as a knee-jerk reaction to any surprise outcome. But a sustained bear market decline of 20% or more would be the result of other factors and not just the election results.
- Purchase put options on the Healthcare sector ETF (XLV). Put options are a form of insurance that generally go up in value when the price of stocks or ETFs decline significantly. Talk to your broker or financial advisor about hedging with put options if you lack options trading experience.
- Sell calls against some of your healthcare holdings. The premiums taken in will offset some of the decline. Consider it an extra dividend that can add 5% to 20% or more to your income stream over time. Again, see your financial advisor about selling covered calls.
- Use any declines in healthcare as a buying opportunity. Better yet, for more advanced investors, sell out of the money strike put options. You pocket the premium no matter what happens. And, if the stock should decline, it will be “put” into your account… i.e., you will be forced to buy it at the strike price. (See issue on The Valeant Atrocities)
- Do nothing and wait it out. This may sound like terrible advice, but some of the wealthiest investors I know, just wait out declines. Bull markets invariably return. Warren Buffett amassed $60 billion in wealth by waiting patiently. Perhaps we all should emulate him.
Should a market slaughter occur as a result of Tuesday’s elections, we will provide as much analysis and insight as possible to our readers.
Now get out there and VOTE!