The feds are getting in the way of one sector’s rise…
Their actions have been hurting these companies for years. And with their thumb pressing down on a key figure, the feds have a big impact on what comes next in this sector.
I’m not talking about police oversight or the FBI knocking on doors. I mean the other Feds… the ones that determine the world’s most important figure in finance…
They monitor how easily and cheaply companies can grow their business. For almost two years, they’ve made it more difficult across the board. But that’s all likely to change starting next year.
And as I’ll explain today, one of the sectors that has been hurt the most in the past two years will likely soar.
The cost to borrow skyrocketed in 2022 and 2023. The Federal Reserve drove its benchmark interest rate up from near zero to around 5.5% today. Now, though, the world expects that rate to fall…
A recent Bankrate survey shows that 94% of economists expect rate cuts in 2024. Only 6% believe we won’t see a rate cut until 2025 or later.
It goes beyond that survey, too. Famed investor Bill Ackman thinks we could see a rate cut in the first quarter of 2024.
And then there are headlines like this one from Fox Business…
We can’t be sure exactly when the first rate cut will be. But the consensus is that it will fall next year.
To prepare, we can look at the markets to find what will soar when rates are low again – that is, when cheap debt returns. And some of the biggest benefactors will be debt-heavy businesses…
You see, when rates are high, debt-heavy businesses suffer. Their future growth prospects dwindle. And they go back to being slow growers as a result.
The opposite is true when the Fed cuts rates. Capital-heavy businesses get easier access to the cash they need to grow. And the gains that follow tend to be rapid.
Biotechnology companies are a great example. They require a lot of capital for research, drug development, and drug trials.
That can mean large debt loads. And at higher rates, that debt burden can hurt a company’s bottom line. It eats into the cash available to invest in the business or pay dividends to investors.
This explains why biotech stocks suffered the past two years. The iShares Biotechnology Fund (IBB) is down 30% since peaking in 2021. Check it out…
Like I mentioned earlier, the federal-funds rate has skyrocketed from near zero at the start of 2022 to 5.5% today. And biotech stocks have taken a beating.
But the opposite tends to happen once rates fall back to low levels. Let’s look at a longer-term chart to see how this has previously played out.
There have been three big biotech booms since 2000. All of them took place after rates fell and the cost to borrow became cheap…
A similar pattern happens each time. Biotech stocks fall during the initial rate cut. Then, they go on multiyear booms with incredible gains on the table.
The first example starts in 2002… The sector rose 101% from July 2002 into April 2004. That’s a triple-digit gain in less than two years.
That rally looks like child’s play compared with what happened in the early 2010s. Interest rates were near zero for six years straight. And IBB rose 583% from its March 2009 low into July 2015.
The latest boom from 2020 through 2021 wasn’t as big. But it was good for a near triple-digit gain in a year and a half, as biotech stocks rose 87% to their August 2021 peak.
We aren’t there yet in the current environment. The Feds are holding interest rates steady for now. But that will likely change in 2024… potentially as soon as the first quarter.
And when rates start to drop dramatically, that’s when you should consider owning biotech stocks.
Good investing,
Chris Igou
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Source: Daily Wealth