Nobel Prize winning poet, T.S. Eliot said “A toothache, or a violent passion, is not necessarily diminished by our knowledge of its causes, its character, its importance or insignificance.”
As 2018 winds down, market volatility is up. In response, market pundits are debating the significance of some not so insignificant market drops as billions of dollars in market value have been erased. As natural contrarians, we have been pondering the “causes” of these losses.
In recent years, we have watched from the sidelines as a handful of popular tech stocks continued to soar to new highs. In fact, earlier this summer, we examined the five years of euphoria surrounding these names and reaffirmed “…most bubbles are only truly understood once the damage is done…the economy has experienced another era of remarkable growth in technology-based businesses led by the near vertical rise of FAANG – Facebook, Amazon, Apple, Netflix and Google…these five juggernauts accounted for nearly a quarter of the S&P 500’s +13.4% gain over the period, even though they only comprised 4.2% of the overall index [at the beginning of the period].” 1
The remarkable run of this gang of technology companies undoubtedly left many investors believing they need not look any further for a reliable return on investment. And then “red” October came around and in aggregate the FAANGs lost $1.1 trillion in market value from their peaks. In percentage terms, the stock prices dropped as much as 20% to 40%.
As many know, our patient view is through a long-term lens. Much of the hype in today’s markets is anchored to a 52-week high. We believe many companies were significantly overvalued as their share prices touched those highs. In other words, our discipline kept us away as the market was factoring in all of the optimism and none of the downside. One thing we have learned with certainty over our 35 year history is that markets simply do not go straight up.
It follows that it may be timely to adopt a new acronym which better reflects today’s investor sentiment. Perhaps FAAAN (replacing “G” for Google with its parent company’s “A” for Alphabet), partially because these companies have so many admirers, and in part because they have fanned the flames of the most recent market melt-up.
In summary, the exaltation surrounding the FAANG stocks has become rather long in the tooth and undoubtedly left many investors with a toothache.
The opinions expressed are current as of the date of this commentary but are subject to change. The information provided in this commentary does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.
- Ariel Investments Monthly Commentary, July 31, 2018
Past performance does not guarantee future results. None of the stocks mentioned are held in Ariel’s portfolios. Portfolio holdings are subject to change. The intrinsic value of the stocks in which Ariel’s portfolios invest may never be recognized by the broader market.
The opinions expressed are current as of the date of this commentary but are subject to change. The information provided in this commentary does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.
