How does the NBI perform in the last quarter of the year?

Inside BIO Industry Analysis

Does the NASDAQ Biotech Index (NBI) outperform the broader market in the last three months of the year, or underperform?

The NBI tends to be up in the 4th quarter, but a lot of that has to do with the overall market, not the biotechs. Here are the returns for the last quarter of the year for the last 20 years: (source: Factset)

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When looking directly at overall performance, biotech and the broader market have had good 4th quarters during this time period: the NBI has been up 14 of the 20 (70%) of these 4th quarters, and the S&P 500 up 15 of the 20 (80%). The average 4th quarter return for the NBI is 7.2%. If we look at median returns (to adjust for the amazing 49% move back in 1999), we see a positive 4.9%.

However, the NBI performance relative to the S&P 500 has been more like a coin toss than a trend. The NBI has outperformed in only nine of the 20 (45%) 4th quarters since 1992. The median return after taking into account the market (NBI return minus S&P500 return) is only -0.6%.

What if we just look at election years? Here is the same data but only for the five election years: (source: Factset)

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It is hard to argue for any significant pattern in outperformance considering we are only looking at n=5, but with only two of the five quarters showing outperformance, I think it is safe to say there is not a trend. These two cases of outperformance were in very different markets, with 1992 being a strong quarter, and 2008 being the big crash. Interestingly, both cases of election year 4Q outperformance occur during Democrat wins by candidates that supported healthcare reform.

One reason this is on investors’ minds is that the NBI is up 55% in the last year, and 40% year-to-date (see table below). Big runs like this tend to spark the “now where to?” discussions, which will most certainly be overheard tomorrow and Wednesday at the BIO Investor Forum.

Here is the year-to-date performance as of October 8th, 2012: (source: Factset)

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*The 1992 and 1993 numbers are for the BTK (AMEX Biotech Index) as the NBI inception was October 1993.

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