Stocks and the Clinton effect

This article appears in the November 2, 2015 issues of National Review.

Financial markets look to the future when pricing assets. If a 50 percent chance emerges that a company will be worthless tomorrow, the price drops 50 percent today. Accordingly, elections can be a time of great valuation stress for those in the crosshairs of candidates. If a candidate with a real chance of victory announces a policy harmful to a specific set of companies, the damage can be significant.

Drug companies research drugs for many years, and occasionally find a winner that can be marketed to consumers. The prices for the few drugs that are ultimately sold to the public are high, as they must be to provide a positive return for all research and development (including the many cases in which it leads to failure). This approach has been an astonishing success in the U.S., and new and innovative drugs for HIV, cancer, and other significant maladies have emerged from the for-profit sector in recent decades.

The high prices of the drugs that make it to market are nonetheless a regular target of progressives, who seem to presume either that private companies will spend billions on drug discovery without a profit incentive or that academic researchers are responsible for all the major breakthroughs. Neither presumption is correct.

On September 21, the Clinton campaign rolled out a plan to “hold the pharmaceutical industry accountable and rein in drug costs.” “This isn’t a new fight for her. She fought against special interests for affordable health coverage in the 1990s,” her campaign website asserts. Indeed, then as now, the Clintons took aim at the pricing of pharmaceutical drugs. For instance, in December 1992, the New York Times wrote that then-president-elect Bill Clinton pledged to “stop drug price gouging” by eliminating tax breaks for companies that raised drug prices by more than inflation as measured by the Consumer Price Index.

In just the five days following her September 21 announcement of her renewed interest in putting a ceiling over the price of pharmaceutical drugs, the S&P Pharmaceutical Industry Index tumbled as much as 6.4 percent. Media accounts widely linked the decline to Clinton’s proposal.

The Clintons’ first pass at bashing this industry attracted the attention of the peer-reviewed economics literature. An April 2001 article in the Journal of Law and Economics, “Gradual Incorporation of Information: Pharmaceutical Stocks and the Evolution of President Clinton’s Health Care Reform,” used sophisticated statistical techniques to assess the impact of the first Clinton effort. Its authors, Sarah Ellison and Wallace Mullin, attribute market-adjusted pharmaceutical-share-price declines of over 50 percent to the Clinton policy push.

You do not need sophisticated analysis, however, to see the negative effect that the Clintons’ 1990s campaign had on pharmaceutical share prices. The nearby chart shows the cumulative decline in the S&P Pharmaceutical Industry Index for every day of U.S. stock-market trading between what Ellison and Mullin identify as the “opening round” of the Clinton pharmaceutical push on January 19, 1992, and the death of the Clinton health-care-reform bill in Congress on July 21, 1994. The cumulative decline during the period is measured relative to the index price on January 17, 1992, the last day of U.S. stock trading before Clinton’s initial announcement. The first day of U.S. stock trading after that announcement—January 20—is day “0” on the chart, which on its horizontal axis shows the number of trading days that have elapsed since January 19. For context, the dotted bar marks the start of the Democratic national convention that would nominate Bill Clinton for the presidency, and the solid bar marks the Election Day that would make him president.

As you can see, the “Clinton effect” on the pricing of pharmaceutical shares is enormous. It reached a whopping –34.8 percent in August 1993. Meanwhile, the S&P was up about 7 percent over the same period. Even by the saga’s end in July 1994, the cumulative effect was –28.8 percent, compared with the S&P’s +8.1 percent. It wasn’t the whole market that tanked—it was the sector that the president ofthe United States and his wife had in their sights. The S&P pharmaceutical index didn’t regain its value until May 3, 1995. The Clintons’ chatter removed billions of dollars from innovative companies, and probably significantly reduced progress towards cures for numerous diseases.

The S&P pharmaceuticals index has for the moment recovered the losses it suffered after Hillary’s statement this September. But the Nineties episode happened when a “New Democrat” was trying to wean his party from its insistence that the era of big government should continue. One can only wonder how bad it will get this time, as Mrs. Clinton proposes anti-corporate policies in an attempt to compete with socialist Bernie Sanders.

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