While the European equity markets have delivered decent returns so far this year, profits on the US market have left much to be desired. And more importantly – they are dependent on just four stocks…
As I write this in late 2015, the S&P 500 is up just 1.5%, a rather paltry figure compared to the 10.5% that the Eurostoxx has booked so far this year, or the 15% you could have earned on German stocks. I could spend ages talking about plummeting oil prices, the strong dollar or the fact that US stocks are simply more expensive, but that is not the point of today’s graph. It shows that US stock market returns depend on the market performance of just four stocks: Facebook, Amazon, Netflix and Google. Or FANG as they are affectionately known.
If we look at them superficially, the four companies do not seem to have much in common. A retailer, a television channel, a search engine and a social media company. That is of course far too simplistic, because it’s clear what the common denominator here is: these are the four largest and most talked about internet companies in the world. The fact that they are not all active in the same sector doesn’t actually matter that much: there is enough overlap to treat them as a single group.
And the graph? It shows that since the beginning of the year the market value of these four companies has increased by a not so dusty USD 440 billion. A sum more or less equivalent to the size of the Austrian economy. On average and according to their market weight in the S&P 500, these stocks have booked gains of 67%, with Netflix (154%) and Amazon (118%) topping the bill. On a graph it looks like this.
What about the rest?
The next obvious question then is: if these four companies have contributed USD 440 billion, what has the rest of the S&P 500 done? The answer is given in the graph below which plots the movement of the S&P 500, the weighted FANG stocks and the S&P 500 without the FANG stocks. What it shows is that if you had taken the four stocks out of the S&P 500, you would have been looking at a loss of 2.3%… So long live the internet stocks!
By the way, to put this all in context, you could more or less write the same story year in year out. Every year there are a number of high flyers, either individual stocks or sectors. This year it is FANG, last year it was Apple and the year before that it was probably the banking sector. The important question of course is which stocks or sectors it will be next year. Anyone got any ideas?
And to reemphasize this point, last week I came across another nice graph showing the FANG. It plots their price movements against those of the CIMQ stocks between 1995 and 2000. CIMQ stands for Cisco, Intel, Microsoft and Qualcomm, the four leading hardware producers at the time of the ‘internet meets TMT’ bubble. After three years of impressive gains, these CIMQ stocks were only actually just starting their meteoric rise, at least in absolute terms.
And for the sake of completeness: this is not a buy recommendation, nor is it a prediction of where the four FANG stocks are headed. In fact, the last thing we want is a repeat of the dot-com bubble. Just to jog your memory: in the years 2000-2002, the Nasdaq lost a whopping 80% of its value…