Why Once High-Flying FAANGs Dragging Down Market Is ‘Red Flag’

The bull market had counted the FAANG stocks and other mega cap tech company shares as its leaders, but now these stocks have become serious laggards, signaling more trouble ahead for the broader market. The NYSE FANG+ Index, which also includes Alibaba Group Holding Ltd. (BABA), Nvidia Corp. (NVDA), Tesla Inc. (TSLA), Baidu Inc. (BIDU), and Twitter Inc. (TWTR), has fallen by 4.2% over the past 12 months, while the S&P 500 has risen by 2.4%.

That trend is a “red flag” for the rest of the market, as Helen Thomas, head of London-based consulting firm Blonde Money, told the Financial Times. “What has happened to ‘the FAANGs’ . . . will eventually happen to the broader stock market,” she stated.

Significance for Investors

Jim Carney, CEO of hedge fund Parplus Partners, observes that returns from the FAANG stocks were bound to diminish simply because these firms had reached a high level of maturity. “You can’t grow at the same level,” he told the FT. “They’re in a new phase–now we will start to see these companies act like normal stocks,” he added.

Regarding the FAANG stocks themselves, Apple is basically flat during the past 12 months, Netflix has plunged, while Facebook, Amazon, and Google parent Alphabet still trade well below their record highs. Here are their respective gains, or losses, for the last 12 months through the close on Oct. 8, 2019: Facebook Inc. (FB), +13.0%, Apple Inc. (AAPL), +1.9%, Amazon.com Inc. (AMZN), -8.5%, Netflix Inc. (NFLX), -22.5%, and Alphabet Inc. (GOOGL), +3.0%.

From their all-time high closing prices, the gains or losses are: Facebook, -18.3%, Apple, -3.3%, Amazon, -16.4%, Netflix, -35.4%, and Alphabet, -8.2%. Alphabet reached its record high close in April 2019, while the others achieved theirs in 2018.

Collectively, the FAANG stocks represent 12.2% of the capitalization-weighted S&P 500 Index, per SlickCharts.com. The FAANG+ group accounts for 12.7%, but note that Tesla is not included, and neither are China-based Alibaba and Baidu.

The Nasdaq 100 Index is even more heavily influenced by these stocks, per the same source. The FAANG stocks are 35.3% of its value, and the FAANG+ group represents 37.5%. Tesla and Baidu are in this index, but not Alibaba.

Meanwhile, high price volatility among the FAANGs during the past year has caused them to lose their previous status as momentum stocks, and thus to being dropped by ETFs and model portfolios that follow this investing strategy, per analysis by DataTrek Research reported by The Wall Street Journal.

The only big tech stock that continues to “fit the bill” as a momentum play is FAAMG member Microsoft Corp. (MSFT), per a note to clients from DataTrek co-founders Nicholas Colas and Jessica Rabe quoted by the Journal. Microsoft closed on Oct. 8 4.0% below its own all-time high, set in July, but up by 24.3% up over the past 12 months.

Looking Ahead

The movements of the S&P 500 and the Nasdaq 100 increasingly have been even more closely correlated with price swings in the FAANG stocks than their weights would suggest, Barron’s reports. Through much of 2019, those correlations have been around 90%, meaning that the broader indexes have been moving almost in lockstep with the FAANGs. As a result, they exert a significant influence on all investors, even those who do not choose to hold their shares directly.