Despite the S&P 500 having made a new all-time high just a few weeks ago, many of the supposed market leaders have not kept pace. Instead, almost all of the FAANNGs (Facebook, Apple, Amazon, Netflix, Nvidia, Google) peaked out either in the summer or fall months of 2018 and have meandered under those previous highs since then.
Q1 hedge fund letters, conference, scoops etc
Why is this important? For one, these are some of the biggest companies in the world, with four of them occupying a top 10 spot in terms of market cap. Beyond that, it calls into question the significance of the modest new high made in the S&P 500. After all, if the leadership group of the cycle is now all of a sudden struggling to lead, what does that portend for the broader market?
That second point is more than trivial. In the 1973-74 bear market it was the Nifty 50 that led on the way down. In the early 2000s bear market it was the TMT stocks. Said differently, it was the shares that everyone thought were infallible – the bellweathers – that signaled that the bull market cycle was over. Those same shares ended up producing some of the worst and in some cases permanent losses of capital.
For example, in the 2000s bear market shares of Yahoo fell from $108 to $4 over the span of two years and never recovered to a new high before the company was acquired by Alibaba. Shares of Microsoft fell from $58 to $21 in a year and then didn’t make a new high until 2016.
When the leadership group of an entire market cycle stops leading, we need to pay attention. As readers can see from the charts below, we are getting dangerously close to a state where the FAANNGs no longer represent market leadership by their lack of new highs.
Yahoo price chart:
Microsoft price chart:
Facebook peaked at $217 in July 2018 and is still 16% below that level.
Apple peaked at $232 in October 2018 and is still 19% below that level.
Amazon peaked at $2039 in October 2018 and is still 10% below that level.
Netfix peaked at $419 in July 2018 and is still 17% below that level.
Nvidia peaked at $289 in October 2018 and is still 44% below that level.
Google (Alphabet) is the only FAANNG to have made a new high in 2019, and just barely. In April Google breached its July 2018 high by 1.5%, but is now 12% below that April level.
As a bonus, here is the Chinese tech leadership equivalent: Tencent. Tencent peaked at $59 in January 2018 (before any of the US FAANNGs) and despite rallying from October 2018, it is still 20% off of its peak level.
As of 4/30/19, Facebook, Apple, Amazon, Nvidia, Alphabet, and Microsoft were held in a Knowledge Leaders Strategy or index.
Article by Bryce Coward, CFA – Knowledge Leaders Capital
