A highlight of the market rally that we saw in 2017 was the stunning performance of technology stocks, particularly the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, Google [Alphabet]). As recently as the summer, the Technology sector had outperformed the broader market by 30% over the prior 18 months (see my Market Commentary “Time to Buy the Staples?” of June 21).
But more recently, the FAANG trade has not been the “sure thing” that many had relied on for so long. Indeed, since the midterm elections, the Technology and Communication Services sectors, where the FAANG stocks reside, are underperforming the market significantly.
Sources: Bloomberg and Standard & Poors
Every one of the FAANG stocks is now in bear market territory, having given up over 20% of their value since their all-time highs. The combined decrease in their market capitalization has been a stunning $1 trillion!
Sources: Bloomberg and FactSet
Whereas the prevailing sentiment in 2017, and indeed through the correction of earlier this year, was “buy the dip”, the sentiment now appears to be “sell the strength.” Just as the market, and especially the FAANG stocks, begin to bounce, another sell-off ensues. As I write on Tuesday afternoon, the S&P 500 is on the edge of correction territory and now negative for the year.
So the question that I’m asked on the street or in line at the grocery has changed from “Should I buy more?” to “Should I go to cash?” Firstly, I can never answer either of those questions without a detailed look at someone’s portfolio, a discussion of their goals and their needs, and their time horizons. But what I can advise definitively is make sure you know what you own and why.
If you look at the performance since reaching their highs, you will see that not all the FAANG stocks are alike. Amazon and Netflix both still have stunningly high valuations as measure by the price-to-earnings, or P/E, ratio. Apple and Alphabet, which haven’t fallen as far, are trading at multiples closer to (in Apple’s case below) the S&P 500 average. They have real earnings and are supported by fundamentals. Facebook has growing pains not atypical of companies who have shown rapid growth and now have to “grow up” and become a different kind of corporate citizen.
My point is that each stock has its own unique risks; each company has its own unique strengths. Through diligent research, and an understanding of what each individual investor’s goals and needs are, a discipline for that investor can be developed. If your discipline was high risk, momentum trading, you probably did quite well up until a few months ago with the FANG stocks. That trade appears to have run its course, at least for now.
At Farr, Miller & Washington, we serve our clients by taking a long-term approach. Momentum and narratives will ebb and flow, but we have faith in the US economy and the American system, and that investment strategies informed by data and fundamentals will serve our clients well through the ups and downs of market cycles.