Last Quarter Markets Got De-FAANGed

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Posted: Jan 29, 2019 11:37 AM
Last Quarter Markets Got De-FAANGed

The chart below shows that for several years, growth stocks strongly outperformed value stocks. In plain terms, that means that already expensive stocks got very expensive, and already very expensive stocks then went on to get very, very expensive.

(*Growth in blue; value in orange.)

That pattern reversed in the 4th quarter of 2018. Both expensive and cheap stocks sold off, but expensive sold off more. Gravity re-asserted itself.

(*Growth in blue; value in orange.)

 

Taking a closer look at growth stocks yields additional insight as we see below that FAANG was the driver of growth outperformance.

(*Growth in blue; FAANG in red.)

In other words, FAANG was the growth section of ‘Growth’.

This pattern reversed itself in the 4th quarter of last year:

(*Growth in blue; FAANG in red.)

As the chart above shows, FAANG -- which had been the source of the growth of ‘Growth’, leading the way upwards -- turned around and led the way downward in the 4th quarter.

But which parts of FAANG drove FAANG? Let's look at a disaggregated version of FAANG:

(*Netflix in red; Facebook in blue; Amazon in purple; Google in green; Apple in yellow.)

Over the past several years, Netflix, Amazon and Facebook were the big performers. Facebook, however, sold off in July 2018 (Q3) in the largest single day loss of dollar value in American history.

But if we look at the 4th quarter alone we see a nearly perfect inversion of the history of these stocks:

(*Netflix in red; Facebook in blue; Amazon in purple; Google in green; Apple in yellow.)

The two biggest overperformers in the group, Netflix and Amazon, were two of the three worst underperformers in the fourth quarter. The third highest long-term performer, Facebook, was not among the worst performers in Q4, but that's because it sold off early, making it one of the worst performers in Q3.

Investors who got caught up in momentum prospered for a time, but eventually fundamental principles like inherent value (valuation) and leadership and governance reassert themselves.