The so-called “FAANG” stocks (Facebook, Amazon, Apple, Netflix, and Google (Alphabet)) have been the stars of the stock market during the long and profitable bull market. Over the past 4 years, Over the past four years, Facebook gained 544%, Amazon jumped 268%, Apple increased 170%, Netflix advanced 441%, and Alphabet added 124%. These technology names have outperformed the tech-heavy Nasdaq Composite – up 84% during that time, and the S&P 500 – up 50% during the four-year period. Year-to-date, the Nasdaq Composite has gained 15%, while the Dow is only up a still respectable 7.5%, and the S&P 500 has gained 8.5%.
These powerful tech names have led the bull market advance, and have made investors attractive returns over a long period of time. However, the two-day drop in the FAANG stocks – Friday and Monday – have called this leadership into question, as all five of these stocks got hit hard over the past two days. This morning (Tuesday, 6/13/17), these names are attempting to rebound, with all five advancing. The percentage increases for these stocks are not impressive, and we have a long time until today’s market close – plenty of time for more sellers to come calling.
The question is: Is this a two-day anomaly, or the start of a major new trend in stocks to the downside?
The two-day Federal Reserve FOMC meeting begins today. It is widely expected that the Fed will raise rates by 1/4 point tomorrow. It will be interesting to see if investors take this highly anticipated rate increase as a pivot point for the markets, using it as an excuse to begin reducing exposure to equities. The recent decline in the FAANG stocks may make that decision much easier, as deterioration in leadership stocks is a convenient and high profile event investors can key off of, should they decide to sell.
Some are suggesting that this is merely sector rotation, meaning that money is rotating out of the overvalued FAANG and other technology stocks, and into other sectors that offer better risk-adjusted return potential with lower valuations, etc. While this makes some sense on the surface, there are no other sectors that can offer the kind of explosive returns we have witnessed within the FAANG stocks or in the technology sector overall.