FANGAM Lead the Charge: Another Meaning for FANGAM

Facebook. Apple. Netflix. Google. Amazon. Microsoft.

FANGAM.

These are the household names dominating the technology revolution.

GM. Ford. General Electric. These might be household names, but they’re yesterday’s news.

The power of the FANGAM is so great they can draw strength from weakness.

While the US economy suffers severe contraction and increasing uncertainty, faith in the Big Six has never been more absolute.

From their March lows, FANGAM have risen as one, rewarding the faithful with significant share price appreciation.

FANGAM’s performance has done a lot of the heavy lifting for the S&P 500 Index.

In the market-weighted S&P 500 Index, the Big Six are 21% of the index. That means one-fifth of the S&P’s performance is affected (positively and negatively) by the movement of just six stocks.

Just for the record, the previous time such dominance existed in the S&P 500 was during the peak of the dotcom boom (in 1999).

The Invesco S&P 500 Equal Weight ETF [RSP]…places an equal weight on all 500 companies that make up the S&P 500 Index, a weighting of 0.2% each.

In the RSP, the Big Six carry a weight of 1.2%.

The following chart compares the year-to-date (YTD) performance of the S&P 500 (market-weighted) Index (red line) to the RSP (equal weighted) index (blue line).

The S&P 500 Index — with the price strength of the Big Six — has been a clear outperformer.


The Rum Rebellion

Source: Yahoo Finance

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If I was forced, at gunpoint, to take a position in the US market, which one would be my choice the S&P 500 Index fund or the RSP ETF?

The latter, RSP, would be a clear winner.

Discover five ASX-listed firms that have been beaten down during the crisis…with the potential to rally strongly as the market recovers. Click here to learn more.

History shows us how this ends

And the reason for that is simple…history shows us how this ends.

In the longer term, an underweight exposure to an overbought, overhyped, overvalued handful of market darlings means less capital loss.

RSP is the least ugly option of the two.

The June 2020 issue of The Gowdie Letter delved into past episodes of market infatuation with ‘hot’ stocks…the titans of their generation.

In the United States, the term Nifty Fifty was an informal designation for fifty popular large-cap stocks on the New York Stock Exchange in the 1960s and 1970s that were widely regarded as solid buy and hold growth stocks, or “Blue-chip” stocks. These fifty stocks are credited by historians with propelling the bull market of the early 1970s

Wikipedia

The popularity of the “solid buy and hold growth stocks” is evident in this chart…comparing the performance of Growth v Value stocks since 1974.

The buying momentum (and belief) in this cohort of growth companies, pushed share prices of ‘solid buy and hold growth stocks’ to an excessive premium.

The Rum Rebellion

Source: Star Capital

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As always, the pendulum eventually swings from “over to under”.

When (far more reasoned) fundamental valuation metrics prevailed, that excessive premium subsequently collapsed to a significant discount. 

The swinging of the pendulum acted like an executioner’s axe on the share prices of high-profile growth stocks.


The Rum Rebellion

Source: Hussman Funds

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After the carnage on Wall Street was over, post-mortems were conducted.

In 1977, Forbes magazine published an article titled “The Nifty Fifty Revisited”.

Here’s an extract (emphasis added):

The Nifty Fifty appeared to rise up from the ocean; it was as though all of the U.S. but Nebraska had sunk into the sea. The two-tier market really consisted of one tier and a lot of rubble down below. What held the Nifty Fifty up? The same thing that held up tulip-bulb prices long ago in Holland — popular delusions and the madness of crowds. The delusion was that these companies were so good that it didn’t matter what you paid for them; their inexorable growth would bail you out.’

Getting caught up in market hype appears to be a generational rite of passage.

It would take another 25 years before we saw the next major disconnect between Growth and Value stocks.

A new generation of investors believed — like they did in the 1970s — this time was different.

Why?

The Industrial Revolution was about to be replaced by the Technological Revolution.

Different theme, but same old animal spirits.

When a boom is in full swing, there’s no (perceived) limit to the share prices of popular growth stocks.  

No amount of reason can persuade investors of the folly in this thinking.

Especially when you have dominant players like…IBM, Cisco, Microsoft, Intel, Oracle and Apple.

These were not your run-of-the-mill dotcom start-ups…they were the titans of tech.

Throw in big pharma like Merck and a banking giant like JP Morgan and a fast food whopper like McDonalds and how could you go wrong?

And, therein lies the small but very critical tell-tale sign of a market close to its peak.

Any sentence prefaced with “you can’t go wrong buying…” is the closest you’ll get to a bell ringing at the top.

Whatever that universally recognised risk-free investment is…then you can be assured it’s at a point of MOST risk.

As the growth versus value chart shows, the growth stock excessive premium was once-again plunged into the deeply discounted zone.

Here’s how it happened:


The Rum Rebellion

Source: Hussman Funds

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And, here we are, 20 years later, with a new generation of investors.

It’s somewhat fitting that the most over-valued market in history is now registering the most excessive premium in Growth v Value.

Very poetic…a spectacular climax to precede (what will be) an equally spectacular collapse.

I know people think “it’s different this time”. But it’s not.

Popular thinking is the current generation of high-profile growth stocks are unlike any that have gone before us.

And, given their market dominance, it’s easy to see why that view is held.

In the midst of this absolute belief in FANG[AM] prices growing to the sky and beyond, the prospect of a 50, 60 or even 80% fall in their share prices is not only inconceivable…it’s laughable.

Investors in the 1970s and early 2000s thought the same thing about the growth stocks of those eras.

But fall they did.

The pendulum always swings.

The mistake investors made on each previous occasion — and this also happened in 1929 — is they believe these dominant companies operate in some parallel universe…one that’s not connected to real economic activity.

Facebook. Apple. Netflix. Google. Amazon. Microsoft.

Pain finds its way to the bottom lines of FANGAM

Each one if these companies generate revenue from businesses and consumers in the real economy.

If people out in the real economy are doing it tough, that pain finds its way to the bottom lines of FANGAM.

Flat to falling earnings multiplied by a shrinking PE ratio, produces the blue-chip carnage of 1973–74 and 2000–2002.

Look what happened to the Microsoft PE ratio after peaking in 2000:


The Rum Rebellion

Source: Y Charts

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Unless it’s different this time, expect to see FANGAM leading the charge done…and taking the market-weighted S&P 500 Index with them.

With history telling us how this ‘market darling’ phenomenon ended in 1929, 1973 and 2000, FANGAM should take on a whole new meaning for investors…

Fearful. Anxious. Nervous. Guarded. Alert. Mindful.

Regards,


Signature
Vern Gowdie,
Editor, The Rum Rebellion



Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.


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The Rum Rebellion