The NYSE’s FAANG+ index, which is still up by 10% for the year, is now teetering on bear market territory – it is down by over 19% from its close-of-day peak, which stood at 3046 on 20 June. The big question is whether these drivers of the US bull market this year are beginning to run out of steam? Ultimately, is it time to sell the FAANGs?
According to Russ Mould, investment director at AJ Bell in London, there is an old market rule which says that when individual stocks or sectors that took the broader market indices higher start to tire and roll over, then everyone needs to be careful.
“The ongoing slide in the share prices of the FAANGs in the USA and Baidu, Alibaba and Tencent in China must therefore be followed closely. If this proves to be no more than a so-called ‘healthy correction’ then all well and good, but if these stocks really do start to fall to earth, weighed down by regulatory pressure, growth concerns or simply their enormous valuations, this could have serious implications for investors’ portfolios,” he added.
Apple is still clinging on to its $1 trillion market valuation but Amazon shares are now trading well below that mark. Apple’s more consistent cash flow, which stems from hardware replacement cycles and blossoming app and services revenues, may be providing support for its share price even if the company looks more mature and has lower growth prospects than some of the other FAANGs.
FAANGs for the memory – is the sell-off here?
Netflix shares and Amazon shares are still up this year but they have joined both Google and Facebook shares in bear market territory. Still, the aggregate market capitalisation of the FAANGs stocks is still larger than the entire FTSE 100 combined. The market does not, however, seem to have much tolerance for bad news from the FAANGs: traders want to see good news and no surprises as far as earnings and cash flow is concerned.
UK fund manager Kames Capital has asked some big questions over the Netflix pricing strategy recently and whether its high yield bond investors are what are keeping its performance where it is.
“What would happen to Netflix’s much-vaunted customer growth rates if the service was priced at a higher level to deliver cash flow break even,” asks Stephen Baines, fixed income investment manager at Kames. “We also have concerns over what would happen to the business if management cut back on content spending to a level that could be funded through internally-generated cash flow.”
As for the rest of the US market, if there is trouble at the top with the stocks that have been delivering a lot of the momentum, it can be hard for the followers to replace them. One is reminded of the way that the bursting of the technology and media stocks bubble in 2000 presaged a three year global bear market, with the steep decline in the NASDAQ also bringing down the S&P 500 index. The same was the case with financial stocks, particularly banks, in 2003-2007, and look what happened when they came off the boil.
Going into the year, we felt that Facebook in particular was looking a little too rich and facing some very choppy waters. There was simply too much confidence being attached to Facebook shares, and indeed, some of its partners in the FAANGs index have also been looking a little too expensive. A correction is due, and with the US mid-term elections on the slate for next week, it is looking as if the NASDAQ and S&P 500 will be short opportunities for CFD traders next month.
