The stock market is starting to worry about Bernie Sanders

Key Points
  • Once panned by Wall Street as a socialist with "crazy" ideas, Sen. Bernie Sanders is finally commanding attention from investors.
  • Stocks including Anthem, UnitedHealth and Cigna all traded down at least 2% on Monday. Molina Healthcare, a health insurance company fell 3.1%.
  • Investors have for years dismissed the democratic socialist as little more than a progressive to pull otherwise centrist Democrats further to the left.
  • But an Iowa victory could trigger what "Bond King" Jeffrey Gundlach called a Sanders "scare," a sell-off if the market starts to think the Vermont senator is "more believed in as a real force."
2020 Democratic presidential candidate U.S. Sen. Bernie Sanders (I-VT) speaks during a rally at the Iowa State Fairgrounds on March 9, 2019 in Des Moines, Iowa.
Steve Pope | Getty Images

Once panned by Wall Street as a socialist with "crazy" ideas, Sen. Bernie Sanders is finally commanding attention from investors.

And they don't like what they see.

Shares of the nation's leading health insurance companies sank Monday after a handful of new polling data showed the Vermont Independent had eclipsed longtime front-runner Joe Biden among Iowans one week before the state's key Democratic caucuses.

Stocks including Anthem, UnitedHealth and Cigna all fell at least 2% in early trading. Molina Healthcare, an $8 billion health insurance company based in Long Beach, California, dropped 3.1%.

"There was a battle between Sanders and Warren on who would be the progressive candidate. And Sanders appears to have won that battle," said Thomas Block of Fundstrat Global Advisors. But "people I've talked to continue to not take Bernie that seriously."

"A big win in Iowa could change that," Block added.

An Iowa victory could trigger what Wall Street "Bond King" Jeffrey Gundlach labeled a Sanders "scare," warning investors earlier this month that the biggest risk to the markets in 2020 is the Vermont senator becoming "more believed in as a real force" that investors would have to take more seriously.

"Bernie is stronger than people think," the DoubleLine CEO said on Jan. 7. "I think it will be taken more seriously as the field winnows. The financial markets broadly will have to deal with the fact that there could be a scare that Bernie Sanders is starting to become a plausible candidate for the nomination."

To anyone who's opened a newspaper in the past 12 months, the fact that health-care stocks would fall whenever Sanders sees his support rise may not seem revolutionary. His avowed opposition to private-sector health care — and what he views as excessive profiteering in general — isn't new.

Sanders election odds vs. health-care stocks

The blue line is Sanders' odds to win the Democratic nomination via The red line is the Health Care Select Sector SPDR ETF vs. the S&P 500 (relative performance of health-care stocks).

Source: Jefferies analyst Jared Holz

"If we are going to break the stranglehold of corporate interests over the health care needs of the American people, we have got to confront a Washington culture that has let this go on for far too long," Sanders said in July. "That is why I am calling on every Democratic candidate in this election to join us in rejecting money from the insurance and drug industries."

His yearslong crusade against private health insurance and support for "Medicare for All" was a central pillar of his 2016 campaign as well.

Sanders tweet

What has changed, however, is the way Wall Street is viewing his odds.

The results of a New York Times/Siena College poll released over the weekend showed his support among Iowa voters swelled by 6 points since their last survey in late October, putting Sanders well above rivals such as fellow progressive Sen. Elizabeth Warren and Biden.

Meanwhile, online betting market PredictIt shows Sanders' odds of clinching the Democratic nomination at 40%, 6 percentage points above No. 2 Biden.

Nate Silver's FiveThirtyEight puts Biden's odds of winning the nomination at 2 in 5 (42%) and Sanders' at 3 in 10 (28%). But even that represents a big bounce for Sanders, who earlier this month saw his odds on FiveThirtyEight at less than 20%.

Investors have for nearly two full election cycles dismissed the self-described democratic socialist as little more than a progressive to pull otherwise centrist Democrats further to the left. He was more an interesting thought experiment and testament to the consequences of income inequality than an actual threat for the White House.

The flurry of polling headlines appeared to be enough to convince traders that they should start to account for his chances, however remote.

That can explain two important developments: Why Sanders' proposals to overhaul the American health-care system haven't fazed Wall Street until now and why health-care stocks rallied during the last three months of 2019 as Warren's support waned.

Sen. Bernie Sanders (I-VT), former Vice President Joe Biden, and Sen. Elizabeth Warren (D-MA) enter the stage before the Democratic Presidential Debate at Otterbein University on October 15, 2019 in Westerville, Ohio.
Win McNamee | Getty Images

It's also noteworthy that health-care stocks have been more responsive to changes in political polling during the 2020 election cycle. Though bipartisanship in Washington may to some seem like a lost cause, one area of teamwork between Republicans and Democrats is health-care reform and mutual distrust of health insurers.

That's important given the high likelihood that the GOP keeps the Senate in the 2020 election, meaning that a potential President Sanders or Warren would have to work together with the opposition to pass domestic policy reforms.

That's likely what's keeping the selling in health-care equities in check along with Americans' apprehension toward self-proclaimed socialists, Fundstrat's Block said.

"Bernie Sanders has been an out-and-proud socialist his entire life. And I just think Americans feel that America just is not ready to elect somebody who proudly calls himself a socialist president of the United States," he said.

"The middle of America elected Donald Trump," Block added. "And I think the Republicans, and Donald Trump in particular, would use that label to scare the bulk of the electorate. And especially the electorate in the four or five states whose approval will decide the presidency."

Still, some of Wall Street's biggest investors have already raised the alarm that stocks could see a big sell-off if markets start to believe that Sanders could prove a meaningful political threat to President Donald Trump.

Bond investor Gundlach said that the biggest risk to the market in 2020 was the possibility of Sanders becoming president.

Longtime hedge fund manager Stanley Druckenmiller said something similar last summer, warning that stocks could plummet if Sanders is elected president.

"If Bernie Sanders became president, I think stock prices should be 30% to 40% lower than they are now," he said in June.

"The good news is we'd all be much more equal because everybody would be poorer but the rich would have lost a lot more wealth than the poor would have," he joked.

Source: Jefferies, PredictIt

Similar forecasts of doom came in the second half of 2019, when Warren's rise in the polls spurred dire predictions a major market pullback. Though Warren has said she's a "capitalist to my bones," billionaire investors such as Marc Lasry, Paul Tudor Jones and Leon Cooperman all predicted that the stock market would fall 20% or more if she became president.

Fear of Warren at the time corresponded to a strikingly familiar slump for health-care stocks. Performance analysis of the Health Care Select Sector SPDR ETF, which tracks the performance of biotechnology and pharmaceutical companies in the S&P 500, showed strong negative correlation with Warren's nomination odds via PredictIt.

— CNBC's Jesse Pound contributed reporting.

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