Will trendy stocks’ fall signal end to sell- off?
Last year, the Standard & Poor’s 500 index was basically flat, but it would have been negative without the help of four stocks known as the FANGs.
Facebook, Amazon, Netflix and Alphabet ( formerly and still better known as Google), were up 83 percent on average. If you eliminated those stocks and the six others that contributed most to the S& P 500’ s performance last year, the index would have done about 3.7 percent worse, according to a blog post by investment firm AQR.
But this year, the FANG stocks have fallen 17.2 percent on average, and all but Facebook are trailing the overall market.
Some investors see their reversal, and the reversal of momentum stocks in general this year, as a sign that the stock market sell- off that started late last year could be nearing an end. Momentum stocks are the market’s fashionistas, the trendsetters that everyone wants to buy, almost regardless of price, because everyone else owns them. The S& P Momentum index, a subset of the S& P 500 that includes stocks that have done the best ( adjusted for volatility) over the past 12 months took a turn for the worse in January.
“There are no guarantees, but this could be a sign of the final capitulation, if even the most glamorous stocks are being sold,” said economist Ed Yardeni.
Worse yet to come?
Others see it as a sign that things could get even worse. “We take the fact that not just momentum stocks but essentially all of the old leadership ( such as consumer discretionary and health care stocks) are now under pressure as a sign that the bear market is now fairly well advanced. That being said, we still see considerable further downside in the S& P 500 — another 10 to 15 percent,” said Doug Ramsey, chief investment officer of the Leuthold Group.
Ramsey and others saw investors piling into the FANGs last year as a sign that the bull market could be nearing an end.
In a slow- growth economy, investors were willing to pay up for companies that could generate strong revenue growth, even if their earnings were lacking, on the belief that they could turn those revenues into profits simply but cutting or restraining spending. “Some of the tech darlings got extremely expensive,” said Russ Koesterich, BlackRock’s global chief investment strategist.
Unforgiving investors
That started to change in August, when stock market volatility, which had been low and stable, kicked up. “That’s when a lot of these momentum trades broke down,” Koesterich said. Since then, any company that shows the “slightest whiff that growth is decelerating ... gets punished very quickly and very harshly.”
As one company after another got whacked, investors piled into fewer and fewer stocks. “The narrowness of the market last year concerned a lot of people. That obviously had to come to an end,” Koesterich said.
What comes next for the FANGs depends on “what gets us out of this” downward spiral, he said.
If, in the next few weeks, there is some stabilization in China, and the U. S. economy looks better, people may decide we are not falling off a cliff. If the world looks like it did in 2015, “we might go back into the FANGs — maybe not that exact list but a similar list of companies” that can increase revenue in a slow- growing economy.
Several scenarios
If things remain volatile and what gets the world economy in better shape is central bank intervention, “in that scenario, you expect different ( stock market) leadership,” he said. “Some of the riskier areas might do better, like emerging markets.”
If, on the other hand, we go into a recession, investors will continue buying what they have been buying the last few weeks — defensive industries that can deliver consistent earnings in a weak economy, such as consumer staples, telecom and health care ( excluding biotech, which were among last year’s winners).
If the market falls more than 20 percent — a bear market — the stocks likely to lead the way out of that bear market will also be new.
Late in a bull market, investors tend to buy growth stocks, said Sam Stovall, U. S. equity strategist with S& P Global Market Intelligence. Early in a bull market, they buy value stocks, which are companies trading below various measures of their intrinsic value. “At the end of a sell- off, people have priced them like they are going out of business. Because they are not, they offer the most attractive turnaround possibilities.”