“Are we headed for another market crash?”
My news feed has recently become inundated with articles that use some variant of this headline. This typically starts happening with the first signs that volatility may be returning to the market because, let’s face it, the media loves a good story that prays on people’s fears.
The truth of the matter is, we still have a ways to go before the recent overall market decline is historically notable. However, if you look at the recent performance of some of the largest, most widely followed stocks in the U.S., you’ll see that they’re already well in the throes of their own personal bear market. After Mr. Market was finished doing his best Ebenezer Scrooge impression this past Monday with the S&P 500 and Dow having their worst Christmas Eves ever both Apple (Nasdaq: AAPL) and Amazon (Nasdaq: AMZN) found their stocks down 34% from their 2018 highs. Alphabet (Nasdaq: GOOG) was down 23%, and Facebook (Nasdaq: FB) and Netflix (Nasdaq: NFLX) were down over 43%.
This type of performance is in stark contrast to what we’ve seen over the past few years, where the FAANG (or is it now FAANA after Google changed its name to Alphabet?) stocks were consistently some of the best performers. If you have sizable exposure to FAANG stocks, their recent decline might have left you wondering whether they’ll be able to recover or whether all the fearmongering you currently see online and on TV will turn out to be prophetic. Is this just the start of a wider market crash?
Well, as with countless things in life, I’ve got good news and bad news.
Let’s start with the good news
The good news is that corrections are healthy. They help reset expectations and clear out any excessive exuberance that may have been pushing a company’s stock well above its intrinsic value. And if history is any guide, they’re also temporary in nature. It’s important to remember that the performance of a business and the performance of its stock price are two distinct things. They don’t always move in lockstep. The best companies should continue compounding value for their shareholders regardless of what its stock price is doing. And once the correction is over, the stock can go back to reflecting the performance of the underlying business and march higher over time.
Bad news… that may not be all that bad
Whenever you log into your brokerage account, you’ll notice that the value of these positions has declined significantly from what they were just a few short months ago. And seeing your portfolio shrink before your eyes isn’t very fun. However, long-term-focused investors will quickly realize that this “bad news” may actually be nothing more than good news in disguise. Just as markets are prone to overvalue stocks during periods of exuberance, markets seldom get it right during corrections, meaning shares of strong companies often end up in the bargain bin. Taking advantage of this irrational behavior during corrections is, in our view, one of the best ways for investors to outperform the market over the long haul.
And as for whether the FAANG stocks are going to pull the rest of the market down with them, although we are firm believers that trying to predict what the market will do over the short-term is a fool’s errand, we’re not entirely convinced by this narrative. It may seem like a distant memory, but the truth is that the current situation is the exact opposite of what bearish pundits were using as irrefutable evidence that the next bear market was right around the corner back in 2015, when for part of the year a handful of stocks accounted for over half of the Nasdaq’s year-to-date gains and more than 100% of the S&P 500’s. Even if 2019 ends up looking a lot like 2008 we don’t believe FAANG will be to blame.
To be fair, the recent stretch of outperformance by FAANG stocks was certainly unique given how large all of the companies were prior to their respective runs higher. And although we don’t adhere to the belief that large companies can’t outperform over long periods of time—Microsoft (Nasdaq: MSFT) has soundly outperformed the S&P 500 since it first laid claim to being the largest public company in the world in 1998—we also know that it’s unreasonable to expect a given stock to always outperform the market.
Valuation is not an exact science; both investors and the market will make mistakes. From this vantage point, the recent weakness in FAANG stocks was likely long overdue and will ultimately be constructive to the health of the overall market.
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—Jonathan (JP) Bennett, CFA
The content in this message is provided for informational purposes only, and should not be relied upon as recommendations or investment advice. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The mention of these specific securities above does not constitute a recommendation by 1623 Capital.