Facebook was pounded this week.
After missing the estimates, shares of Facebook feel 20%. While not a FAANG stock, Twitter also experienced similar results. Google hit it out of the park yet was up a mere 3%. Amazon also did well but was flat.
In the first half of 2018, the FAANG stocks were the market. All the growth came from those companies. Without the FAANG, the S&P actually would have been negative on the year.
In fact, since 2013 these 5 stocks went from $1.2T to over $4T.
The importance of the move in FAANG is that they could be ending the bull run. Market trends end because of a reversal in sentiment. For the past 4 years, everyone is all in on these stocks. Now, for the time being, they are being dumped. Historically, the stocks that lead the market up, because of their multiples, tend to bring it back down.
There is little doubt the FAANG did a fair share of the lifting on behalf of this market.
ETFs are the main reason for the incredible run. As shown by this chart, the number of funds holding these stocks exploded.
2017: 501
2016: 430
2015: 332
2014: 277
2013; 230
2012: 175
2011: 101
2010: 62
2009: 14
2008: 9
With the asset markets so extended, a correction of 40% could be in order. If the FAANGs are rolling over, it will take the entire market with them. As FAANG goes so does the market.
This market run up coincided with the real estate market, one that is showing some cracks. Also, the economy faces headwinds including a trade was which could shave 20% off the S&P alone.
The convergence of these all turning together could make this recession a lot worse than 2008. Unlike last time, which was a liquidity issue, we will see the Governments and Central Banks go to the wrong playbook. This time will be a valuation problem which is not solved by pumping liquidity into the market.
Nevertheless, that is what they will do.
Watch the FAANG stocks. If they continue to roll over, things could get pretty bad.
To read more about this in depth:
https://www.peakprosperity.com/blog/114231/faang-nary-coal-mine