May 16, 2013 Morayea Pindziak

This Time Baby, I’ll Be Bulletproof

When the topic of defensive sectors comes up, we almost always hear “health care” in some capacity thrown into the ring. The theory seems to be that people will always get sick without regard to market conditions and will still spend on health care and drugs to get better.

In this article we try to answer the following question: Are the pharmaceutical and biotechnology sectors defensive plays during a bear market, and how do they compare in a bull market?

First we identified bull and bear markets in the S&P 500 from 2000 through 2013 as the sample. During this time there were three bull markets and three bear markets. The average bull market lasted 692 trading days while the average bear lasted 406.

table 1

Along with tracking the S&P 500, we also followed the AMEX Pharmaceutical and Biotechnology Indices to represent their sectors. Table 2 shows the tracked indices from 2000-2013.

table 2

We decided against using individual pharmaceutical and biotechnology stocks because too often their short term success or failure is tied directly to one product. We wanted to look at the sector as a whole.

The period of 2000-2013 was a tumultuous time for the markets, the S&P 500 grew 4.59% after several large dips, at one point (March 2009) it had lost 55.71% from our March 2000 starting point. Our analysis period begins in March 2000 when a significant bear market started. After a short lived bull market the market continued to drop until late 2002 when a bull market from October 2002 to July 2007 recouped most of the heavy losses from the years prior. However this was followed by the financial crisis bringing the markets down severely from 2007 to 2009. Currently we are in a bull market with the S&P flirting with all-time highs. Figure 1 shows the percentage change from 2000 to 2013 in the S&P while using 3/24/2000 as the base.

table 3

As evidenced by the graph the past 13 years in the markets have showed a significant amount of movement and volatility. This is a perfect scenario to see how pharmaceuticals and biotechnology firms faired during the sharp declines and ascensions. Did they fall as low as the S&P 500? Is there a shorter recovery time after a bear market? Could these stocks be an early indicator of a bull market? Figure 2 brings in our AMEX Pharmaceutical and AMEX Biotechnology index alongside the S&P 500 over the same period of time.

table 4

While the S&P 500 and the Pharmaceutical Index (^DRG) were much less volatile than the Biotechnology Index (^BTK), they did not recover from loses as quickly or see the high gains that the Biotechnology Index did during the bull markets that the Biotechnology Index did. Table 3 shows the overall and annualized return for the bull and bear markets.


The AMEX Biotechnology Index lost 43.35% of its value, during the 2002 bear market. This loss was larger than the S&P 500’s largest loss of 36.77% from 2000 to 2001 and the AMEX Pharmaceuticals’ largest loss of -26.20% during 2002. However, the AMEX Biotechnology Index also had the largest gain of our tracked indices; it gained 146.98% in the bull market from 2002 to 2007. This 146.98% gain was over six times the return of the pharmaceutical index and 1.5 times that of the S&P 500.

Table 4 lays out the average annual returns for each index during the bull and bear markets.

table 6

During the bear markets the S&P 500 lost at an average annual rate of 27.17%, while the AMEX Pharmaceutical Index lost less than half that at 12.16%. The AMEX Biotechnology Index lost closer to the S&P 500 but still less at 21.99%. While the AMEX Pharmaceutical Index was the safest during the bear markets, it proved to be a laggard in the bull market gaining at an annual clip of 8.15%, while the S&P 500 gained 22.04% and the Biotechnology Index improved a stellar 31.97%.

Next we look at the overall and segmented correlated volatility of the AMEX Pharmaceutical and AMEX Biotechnology Indices using the S&P 500 as the benchmark. Table 5 shows the overall and segmented beta of both indices.

table 7

During the early bull and bear markets there is little correlated volatility between the AMEX Pharmaceutical and the S&P 500 especially during the bull market of late 2001 when the AMEX Pharmaceuticals were almost perfectly uncorrelated with the S&P 500. The bear market in 2002 began a time a fairly consistent correlation with the Pharmaceutical Index and the S&P 500 with an average beta of .69 during that time. The overall beta during our analysis period was .63 which means the Pharmaceutical Index often moved in the same direction of the S&P 500 but had smaller movements as a whole.

The AMEX Biotechnology Index presents an interesting case, during the early bull and bear markets when the AMEX Pharmaceutical Index saw little correlation the Biotechnology Index actually saw negative correlation. When the Pharmaceutical Index became more correlated with the S&P 500 so did the Biotechnology Index whose beta went over 1 during the 2002-2007 and 2009 – Present bull markets. This led the average beta to be over 1, meaning that the Biotechnology Index’s movement is in the same direction as the S&P 500 but has a greater amount of movement and is more volatile.

The answer to our original question,

are the pharmaceutical and biotechnology sectors a defensive play during bear markets, seems to be “yes.” Both the AMEX Pharmaceutical and Biotechnology Indices fell at a lesser rate than the S&P 500 during bear markets. The Pharmaceutical Index may be the more defensive play as it lost at an average annual rate of more than two times less than the S&P 500. However, the Biotechnology Index which fared better than the S&P 500 during bear markets, albeit not by a wide margin, gained almost four times more than the Pharmaceutical Index and also outperformed the S&P 500 by almost 10 percentage points during bull markets.

table 8