Hello, and welcome to today’s episode of Street Smarts. I’m Billy Cooper, Investment Management Planner, here at Howe & Rusling.
In today’s episode I will be discussing the impact of big tech in the rapid resurgence of the overall market we have experienced thus far in 2020 as well as add a little perspective in relation to history. So, where are we currently? Well to give a quick recap, the S&P 500 hit an all-time high on February 19 prior to the emergence of the Coronavirus and mandated shutdown which subsequently triggered a staggering 40% sell off, hitting its floor on March 23rd. Since, we have witnessed an impressive rally to bring the S&P back to positive territory year to date.
Now to give this rally a little more color, we are currently seeing a market where the big five tech companies, often referred to collectively as the FAANG stocks – Facebook, Apple, Amazon, Netflix, and Google – currently make up around 21% of the S&P 500 market value. And important to note, the S&P 500 is a market-cap weighted index, which means the stocks are weighted according to their current market value. With that said, through the end of June, the FAANG stocks were up an average of over 45% while the remainder of the index was down about 6%. To look back in time, if you were to have invested in each of the FAANG stocks five years ago you would have earned a 440% return.
Naturally, one might think, why don’t I just buy shares of the FAANG stocks and call it a day? Well – to quote Stein’s law, “if something cannot go on forever, it will stop.” In essence, seemingly unstoppable trends do have limits as past performance is not always indicative of future results.
To put this into perspective of history, let’s talk about 1999 and 2000 when we saw a similar market where the S&P was dominated by tech, again occupying over 20% of the index. From 1999 to 2000, on the back of the internet craze, the tech index nearly doubled in 15 months, while the broader S&P gained just over 25%. Sounds a bit familiar, right? Though by the end of 2000, the nearly 100% gain had all been lost, with a two-year return of about -4%.
To bring it back to today, the tech sector’s current outperformance of the broad S&P 500 has only been surpassed by the outperformance of that period in 1999 and 2000. Now does this mean that the tech sector is ripe for a sell off? We believe the FAANGs’ have the ability to sustain high sales and profit growth rates despite consistent pressure from lawmakers and regulatory authorities. The growth magnates of the FAANG stocks are reshaping the way technology is used throughout the globe and we believe they will continue to do so in the foreseeable future. But again, with all equity positions you cannot reap reward without taking on some risk. As active portfolio managers, our job is to manage our clients’ risk by diversifying holdings throughout the many sectors of the market so as to not overexpose our clients to any single headwind.
If you have any questions about the current market environment and the impact of the FAANG stocks on your portfolio, please don’t hesitate to reach out to your portfolio manager.
Thank you for tuning into today’s episode of StreetSmarts with Howe & Rusling.