Healthcare And Biotech Outperform As Recession Fears Heat Up

September lived up to its billing as a lackluster month for the stock market, as the S&P 500 lost another 9.1% to stumble into the end of the quarter at new bear market lows, down 25% since its peak at the start of the year.

Wall Street economists are getting more pessimistic by the week with the Federal Reserve showing no indication of slowing its pace of interest rate hikes to tame inflation. Morgan Stanley expects the S&P 500 to bottom out between 3,000 and 3,400 later this year or early next year, a further decline of 6% to 17%, and Goldman Sachs projected the index would fall to 3,150 in the next six months if the economy falls into a recession.

Another example of the pervasive bearishness is the American Association of Individual Investors’ sentiment survey showing more than 60% of retail investors holding a bearish view, the first time this sentiment gauge has exceeded 60% since October 2008.

The market is beginning to behave like a recession is underway, with big-ticket retailers some of the biggest losers as inflation stays persistently above 8% and consumers have limited disposable income. Used car seller Carvana (CVNA) is one of the market’s biggest fallen angels this year, and an early third-quarter bounce in July and August proved to be ephemeral. Carvana crashed 37% in September, bringing its year-to-date decline to 91%, and fell 20% in one day this Thursday when competitor Carmax’s earnings in its fiscal second quarter came in significantly below expectations.

Online furniture and home goods retailer Wayfair (W), another top performer early in the pandemic, declined 37% in September and is also down more than 90% from its 2021 peak. Small cap furniture stocks like La-Z-BoyLZB
Incorporated, Bassett Furniture Industries and Kimball International fell double digits as well. Living room makeovers can wait while the economy is on shaky ground.

The biggest losers of the month among U.S. companies worth at least $2 billion were Getty Images (GETY) and Sotera Health (SHC). Getty shares tripled in price during a short squeeze in the days following its July 25 IPO via a SPAC merger, but it has since retreated to below its initial price of $10 per share. It fell 67% in September and now trades at $6.60. Sotera declined 58% this month after a jury found its Sterigenics business liable for causing a woman’s breast cancer due to carcinogenic emissions from its plant in a Chicago suburb and awarded the woman $363 million in damages.

Sotera Health was an outlier relative to its healthcare peers, which were some of the market’s best performers of the month as cash flowed into a historically safer, defensive industry. The S&P Healthcare index only lost 1.4% in September, and the Nasdaq Biotechnology Index declined just 0.6%. Mark Haefele, chief investment officer of UBS Global Wealth Management, wrote in a note that market’s relief about the drug pricing reform passed by Congress in August could also be a tailwind for the industry.

“The threat of drug price negotiation in the US has long been viewed as a negative for global pharmaceutical companies. In our view, the measures are far from the worst case for the industry,” Haefele said. “We estimate the actual impact will be less than 3% of global pharma earnings over the next 10 years, much less than initially feared.”

September’s biggest winner was Prothena Corp. (PRTA), a Nasdaq-listed firm based in Ireland developing drugs for neurodegenerative diseases which more than doubled, riding the coattails of Biogen’s promising results for a new Alzheimer’s drug. BiogenBIIB
ended the month up 38% to raise its market cap to $40 billion, far outperforming any other large cap stock. Cano Health (CANO) was another notable midcap gainer, up 42% after the Wall Street Journal and Bloomberg reported CVS and HumanaHUM
are interested in buying it. The Miami-based primary care provider went public in a SPAC deal in 2020 and had lost almost half its value before this month.

These are the 10 U.S. listed midcap companies with market capitalizations between $2 billion and $10 billion that performed the best and worst in September, according to Factset data.