FAANG Stocks and Their Impact This is not an unusual phenomenon

A lot of investors are becoming worried that this year’s stock market gains are being driven by just
a handful of stocks – the FAANG stocks.

If you don’t know, the term FAANG is an acronym for five technology names – Facebook, Apple, Amazon, Netflix and Google (which is technically Alphabet, but FAANA is not as cool sounding). Let’s examine FAANG’s impact for a second.

As of June 2017, the market capitalization of these companies was as follows: $438b (Facebook) + $468b (Apple) + $775b (Amazon) + $68B (Netflix) + $665B (Google) = $2.4 trillion. Shockingly, that $2.4 trillion is bigger than the entire economy of Mexico, bigger than the economy of Italy, bigger than Spain and about 50% bigger than Canada. O Canada.

FAANG’s Performance

In terms of performance, through the end of August 2017, investors saw:

Facebook up almost 50%
Amazon up over 30%
Apple up over 40%
Netflix up over 40%
Google up over 20%

These returns trounce the 10% rise in the S&P 500 during the same period.

FAANG’s Size Within the Overall Market

Here are a few other things to note:

The technology sector makes up about 23% of the market weight of the S&P 500 (by way of comparison, technology comprised about 34% of the S&P 500 during the tech bubble in March 2000)
The FAANG names make up over 10% of the S&P 500

So while some might be worried with the gains driven by so few names, there is something investors need to remember: that’s usually how it works with market-cap weighted indices – very few names usually account for the majority of the gains.

Taking Out the Best Performers

In fact, the original FANG stocks – Facebook, Amazon, Netflix and Google – Apple was added later by Jim Cramer – also accounted for a large part of the S&P 500’s return in 2015.

So AQR decided to analyze the impact of individual stocks on the S&P 500 from 1994 to 2014 and compare the results to the 2015 FANG-driven returns. AQR also showed what the impact on the overall stock market performance would have been if you removed the best performing stocks each year. The results are eye-opening.

Ten Names Drive Half the Performance

From 1994 to 2014, the S&P 500 returned just over 9% a year – actually 9.3% a year. And the top 10 stocks accounted for almost half of the total gains – accounting for 4.1%. Here is the chart showing what would happen if you took out the best performing stocks during a given year:

Results of Removing N
Stocks With Highest Return Impact

N	Impact on 2015 Returns	Average (1994 – 2014)	STD Event
1	0.8%	0.8%	-0.1
2	1.6%	1.4%	0.2
3	2.0%	1.8%	0.2
4	2.4%	2.2%	0.2
5	2.8%	2.6%	0.1
6	3.0%	3.0%	0.0
7	3.2%	3.3%	-0.1
8	3.4%	3.6%	-0.1
9	3.6%	3.9%	-0.2
10	3.7%	4.1%	-0.2
11	3.9%	4.4%	-0.2
12	4.0%	4.6%	-0.3
13	4.1%	4.9%	-0.3
14	4.3%	5.1%	-0.3
15	4.4%	5.3%	-0.3
16	4.6%	5.5%	-0.3
17	4.7%	5.7%	-0.3
18	4.8%	5.9%	-0.3
19	4.9%	6.1%	-0.4
20	5.0%	6.3%	-0.4

Source: AQR

Is This Bull Market Long-In-The-FAANG?

I tell investors every day that this bull market is kind of old – in fact it is more than 3,100 days old, which makes it the second-longest bull market on record. In addition and to give some perspective:

The S&P 500 has enjoyed a total return of over 300% since the bull market began
The average length of the last 13 bull markets was just shy of 1,500 days
The longest bull market ran from 1987 to 2000, lasting nearly 4,500 days

Those statistics are simply to illustrate a point, not to compare the current market environment to 2000 or suggest that a big correction is due.

Remember, past performance is no guarantee of future results. Ever.

Final Thoughts

From my perspective as a seasoned financial advisor, my conclusion is actually pretty straightforward: if you only own the FAANG stocks – or even a few stocks – you are simply not diversified. Period.

Call me to discuss your options.

Distributed by Financial Media Exchange.