FANA actions are stuck in the mud. Is this a break or a change in trend?
Facebook, Apple, Netflix and Amazon are some of the most iconic companies of the past decade. And, while everything in this article should be taken as observations, no recommendations to buy or sell a security, when the generals of the stock markets start to decline, it helps to assess that fact.
You probably know FAANG, the group of 5 stocks that led the Nasdaq and in turn the S&P 500, up for several years. This group and a few others like it created perhaps the most misinterpreted stock market of our generation.
Past performances have passed. The trends are reversing.
The stock market has performed quite well over the past decade. However, much of this success has been attributed to FAANG and similar actions. What they have in common is that they are listed on the Nasdaq (not the New York Stock Exchange), and their earnings have grown at a very rapid rate, as have their valuations.
Most of them do not pay dividends or have very low dividend yields now that their prices have appreciated so much. Obviously, these epitomize the phrase “large cap growth stocks”.
As is often the case, there comes a point in every market cycle when subtle changes occur. They can persist for months or even years, but they are there. Many investors miss these clues, but in retrospect, they help us identify pockets of major risk to our wealth.
Most importantly, these early warning signals help us avoid one of the saddest investment outcomes: where the signs of major risk were present, but you just didn’t see them before it hit. either too late. We’ve all been there. The key is to learn from our experience, both good and bad.
And that brings us to FANA, my offshoot of the FAANG action set. As the chart above shows, their yields have stabilized since the start of September. As the S&P 500 and the Nasdaq each posted returns of around 11% in 5.5 months, the usual suspects, FANA stocks, were not the driving force. This is a rare event in this new decade.
It could be a sign of something. Or, you’re welcome. But I think there is a good chance that we will see a change. Not at or far from specific stocks. But my work on the charts tells me that the change is becoming more and more palpable day by day.
Potential changes under development
- The biggest and most valued sectors are shifting from THE performers and leaders to part of the gang at best and potential leaders down at worst. Look at the year 2000 in your stock market history to learn more about what that might look like.
- Value stocks look more and more attractive, but not overall. It has more to do with certain pockets, especially those related to commodities and sustainable assets. It’s more than just a low p / e ratio environment. Rather, it’s inflation that could be a sentiment to come, bubbling up after years of repression and eclipsed by FAANG / FANA / electric car makers and all the crazy speculative stuff that has dominated recent headlines.
- Long-term interest rates continue to rise. If you’re looking for a catalyst to reduce the outlook for high-growth stocks, here’s a good one. Higher borrowing rates mean two things for growing businesses: higher costs for new borrowing and higher costs for refinancing existing debt.
Above all, they are factors, not a forecast. If we’ve learned anything about the current investment climate, it’s that fundamentals have taken a back seat to emotions in ways many of us haven’t seen. In my case, it goes back as far as the markets of the 80s.
And emotions are a funny thing. They can take a hint of reality, like rising interest rates or the sudden delay in FANA actions, and turn it into a runaway train. If the reasons were very different a year ago, the same concept is potentially present today.
Investing today means considering what worked in the past, but recognizing that clinging to old rules of thumb and old labels can be very dangerous. So-called animal spirits now dominate much of what impacts our wealth.
Do whatever you can to sniff out trends and market pivots that have already started, even if they are not yet in the headlines. It’s a better approach than waiting for the headlines to tell you what just happened.
Comments provided are provided for informational purposes only, and not individual investment advice or recommendations. Sungarden provides advisory services through Dynamic Wealth Advisors.
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