S&P 500 & Nasdaq Analysis and Trends

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Authers’ Note: Fangs for the memories
By: Financial Times | June 25, 2018

When it comes to the Fangs, maybe we should be thankful for more than the memories. We know that the Fang stocks have done well this year. Even Facebook has made back all the ground it lost during its data-privacy scandal. But the impact they are having is growing quite awe-inspiring, and may also be skewing perceptions of the broader market. Without them, even the mighty US stock market would have fallen for the year so far.

It is no longer clear which stocks exactly are FANGs and whether they should instead be FAANGs or FAAMGs or one of a few other acronyms. The NYSE Fang+ index even includes the price of US-quoted Chinese companies such Alibaba and Baidu. For the purposes of this exercise, I took the Fangs to be Facebook, Amazon, Apple, Microsoft, Netflix, Nvidia and Google. According to a few calculations I made on the back of an envelope (or more precisely, with a Bloomberg terminal and a spreadsheet), the market cap of these seven stocks has risen by $772bn so far this year. Meanwhile the market cap of the S&P 500 as a whole has risen by $673bn. Excluding just those seven Fangs takes the S&P from a 2 per cent gain for the year to a slight loss.

Meanwhile the ascent of consumer discretionary stocks to become the best-performing sector of the year so far is also skewed, in this case by only two Fangs. The market cap of the entire S&P 500 Consumer Discretionary index has gained $318bn so far this year, of which Amazon and Netflix on their own account for $375bn.

Strip out these gains and the rest of the index has dropped $57bn in market cap for the year. Thus removing just the two Fangs converts a 13.3 per cent gain for the year (very slightly better than the information technology sector) into a 1.9 per cent loss.

It is not surprising that a few big stocks will account for all or most of the stock market gains, particularly in a year when those gains are not that impressive. But it is also interesting to see the importance of momentum in driving returns. The two clearest factors that can help stock selection that will lead to long-term outperformance are value (buying stocks when they are cheap compared to their fundamentals), and momentum (buying stocks that have been winning, and avoiding or shorting stocks that have been losing).

Value has done badly throughout the post-crisis recovery period. Many predicted that discernment would return, and cheap stocks would perform better, once volatility returned, rates rose, and stock returns grew more dispersed. These things are happening, but instead the result has been for momentum to take an even greater lead — a phenomenon intimately tied up with the Fangs. This is not just an US phenomenon. The following chart shows how the strongest momentum stocks in the MSCI World index (covering all developed markets) has fared so far this year compared to the strongest value stocks: 




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This is an unnerving picture. The momentum of the most popular stocks gets ever stronger as they hurtle upward, while unloved cheap stocks grow ever cheaper. 

To show the importance of the Fangs another way, here is the performance of the NYSE Fang+ index, compared to the FTSE All-World index since the start of the year (and my apologies for my difficulties with our new graphic software):




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World stocks as a whole are down very slightly for the year. It is just as well that the Fangs are there.

For a negative view on this: world stock markets have run out of steam and confidence, while investors instead pile into some genuinely strong companies and bid them up towards levels that cannot be sustained.

For a positive view: stocks entered the year plainly overpriced. With US earnings performing as well as they have, it looks as though a lot of stock markets may be going through what was a very necessary correction, whose effect is masked by the Fang phenomenon. And several of the Fangs still do not look expensive by conventional multiples. 

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