The FANG Effect: A Narrow Market Trend Driving Volatility

Strategic Insights -

In 2015, four stocks known as the FANG acronym (Facebook, Amazon, Netflix, and Google/Alphabet) dominated the U.S. equity market, echoing the late 1990s' Four Horsemen (Cisco, Dell, Intel, and Microsoft). This narrow market trend, characterized by a small number of stocks driving market returns, is concerning investors. The FANG stocks' high valuations are creating fragile rallies, and their investment risks are escalating as the market continues to rely on a few winners.

Key Takeaways:

  • The FANG stocks (Facebook, Amazon, Netflix, and Google/Alphabet) drove U.S. equity market returns in 2015, with Amazon alone contributing 24.5% of the S&P 500 index's upside.
  • The FANG stocks added 32 positive points to the S&P 500 index, which was down 60 points for the year.
  • The market's reliance on a few winners makes rallies fragile, and a decline in these stocks' performance could significantly impact the benchmark.
  • FANG stocks' valuations are increasingly high, with Amazon trading at 966.7 times trailing profits, Netflix at 312 times earnings, and Facebook at 105 times earnings.
  • Alphabet (formerly Google) has a relatively reasonable price-earnings ratio of 35.7 times, but this is still twice the S&P 500 average.

Statistics:

  • A $10,000 investment in the S&P 500 would have lost $259 or 2.6% in 2015.
  • A portfolio consisting of a $2,500 investment in each of Facebook, Amazon, Google (Alphabet), and Netflix would have generated a gain of $8,250 or 82.5%.
  • The S&P 500 index lost 60 points in 2015 compared to the 32 points added by the FANG stocks.

Sources:

  • Bloomberg data
  • Globe Investor's Inside the Market online article by Scott Barlow
  • Globe Unlimited at globeandmail.com/globeunlimited