By Biotech has faced significant challenges this year, but the sector’s mergers and acquisitions have been thriving, resulting in positive gains for biotech stocks. The equal-weighted SPDR S&P Biotech exchange-traded fund has seen a 7.6% increase this year, while the market cap–weighted iShares Biotechnology ETF has risen by 3.8%. Although both fall behind the S&P 500 index’s 24% growth, they have rebounded substantially from their low points in October, when the iShares ETF dropped by 13% and the SPDR Biotech declined by 20%.
The Impact of Borrowed Capital and Federal Reserve Policies
The positive performance of biotech stocks can be attributed to a few factors. Many biotech companies heavily rely on borrowed capital to finance their research endeavors. As a result, when the Federal Reserve raises interest rates, the cost of money increases, posing challenges for cash-burning biotech firms. It is therefore no coincidence that the turnaround in biotech stocks has aligned with the Federal Reserve’s consideration of rate cuts rather than hikes.
Mergers and Acquisitions Driving Momentum
In addition to favorable Federal Reserve policies, mergers and acquisitions have played a pivotal role in driving growth in the biotech sector. Bristol Myers Squibb recently announced its acquisition of RayzeBio for $4.1 billion, while AstraZeneca revealed its plans to acquire Gracell Biotechnologies for $1.2 billion. Since early October, a total of nine out of the 20 biotech acquisitions worth $1 billion or more have been announced, according to BioPharma Dive data.
Positive Outlook for the Future
Market analyst Katie Stockton from Fairlead Strategies believes that more gains are on the horizon for biotech stocks. She points out that the SPDR Biotech ETF has surpassed its 200-day moving average relative to the S&P 500, indicating the potential for a larger reversal and upward momentum for biotech stocks in the coming months. However, the continuation of this positive trend relies on the Federal Reserve’s cooperation.
Last Week’s Market Summary
Santa Claus Rally in Year-End Trading
In a short and relatively calm week of year-end trading, a “Santa Claus rally” took place. Stocks extended their eight-week winning streak, with the Dow industrials reaching record highs and gaining 0.8%. The S&P 500 narrowly missed setting a new high, rising by 0.3%, and the Nasdaq Composite increased by 0.1%. Overall, the Dow rose by 13.7% for the year, the S&P 500 by 24.2%, and the Nasdaq by an impressive 43.4%. Bitcoin experienced substantial growth, ending the year up over 158%, while gold rose by 13%. Moreover, 30-year fixed mortgage rates peaked at 8.45% in October but closed the year at 6.6%. It has truly been an eventful year in the markets.
Companies
AP Moller-Maersk started sending ships through the Red Sea, under the protection of a U.S.-led coalition. Toyota Motor achieved a record-high global production and is on track to become the world’s largest vehicle maker for the fourth consecutive year. Apple has resumed the sale of its latest smartwatches as a patent case is being reviewed by an appeals court. The New York Times has filed lawsuits against OpenAI and Microsoft for copyright infringement. JPMorgan Chase accounted for nearly 20% of all U.S. bank profits in the third quarter of this year.
Deals
Shortly after acquiring Karuna Therapeutics, Bristol Myers Squibb agreed to acquire radiopharmaceutical developer RayzeBio for $4.1 billion, at a premium of over 100%. AstraZeneca announced its plans to purchase Chinese cancer drug maker Gracell Biotechnologies for up to $1.2 billion. James Ratcliffe, the founder of chemical conglomerate Ineos, has agreed to buy 25% of Manchester United Class B shares from the Glazer family and has also launched a tender offer for 25% of Class A shares. This deal values the soccer club at $5.4 billion.
Next Week
Monday 1/1
Equity and Fixed-Income Markets Closed
In observance of New Year’s Day, equity and fixed-income markets will be closed.
Federal Open Market Committee Minutes Publication
The minutes from the mid-December monetary-policy meeting of the Federal Open Market Committee (FOMC) will be released. At this meeting, the FOMC decided to maintain the federal-funds rate at a range of 5.25% to 5.50%. Wall Street interpreted Fed Chair Jerome Powell’s post-meeting news conference as dovish, leading to a significant cross-asset rally to end the year. Traders are currently pricing in six 25-basis-point cuts to the federal-funds rate by the end of 2024, while the FOMC has only projected three cuts.
Job Openings and Labor Turnover Survey Release
The Bureau of Labor Statistics will publish the Job Openings and Labor Turnover Survey data. The consensus estimate suggests there will be 8.75 million job openings on the last business day of November, slightly higher than in October. Job openings are currently at their lowest level in two and a half years.
Friday 1/5
December Jobs Report Release
The Bureau of Labor Statistics is set to release the jobs report for December. Economists predict a 155,000 increase in nonfarm payrolls, following a gain of 199,000 in November. The unemployment rate is expected to slightly rise from a historically low 3.7% to 3.8%.
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