Plus ça change
Last week I was discussing with a client the recurrence of similar themes in financial markets across the decades. For example, the ostensible similarities between the “Nifty Fifty” era of the late 1960s and early 1970s and the current fascination with the “FAANG” stocks – Facebook, Apple, Amazon, Netflix and Google parent Alphabet. For those who weren’t around then, the Nifty Fifty stocks were a basket of famous names that were the leading growth stocks of their day. It was said that they were “single-decision stocks” which meant that you could simply buy them and hold them on the basis that they would always grow. They included the likes of Kodak, Coca Cola and Xerox.
Reports noting this apparent similarity are typified by a CNBC article from August this year. It claims that, at their peak, the Nifty Fifty represented almost all the gains of the S&P 500. In the same way, the FAANG stocks are claimed by some commentators such as the Washington Post to have accounted for the entire return of the S&P500 in 2015 or, according to Bloomberg, almost a third of the index’s gain earlier in 2017.
For some, the focus on the recent dramatic equity market gains being concentrated in so few stocks is attributed to investor nervousness or as a portent that this bull market is reaching a peak. But for those that have examined this more closely, such as Cliff Asness in research published in 2016 cited by Bloomberg, this is merely SNAFU or “Situation Normal, All-FANGed Up”. Asness looked at the impact of individual stocks on the S&P 500 from 1994 to 2014 and compared the results to those of 2015, the year of particularly dramatic FAANG impact. His aim was to show what would have actually happened to the index return if the best performing stocks had been removed each year.
In fact, his research showed that between 1994 and 2014 the S&P 500 generated a return of 9.3% a year with the top 10 stocks delivering almost 45% of the total gains. So, whether you look at the Nifty Fifty or the FAANG stocks it is hardly unusual, in a historical sense, for a large chunk of the index return to be generated by a concentrated group of stocks.
Asness’ moral of this tale? “To be wary of anecdotes even when (maybe especially when) they’re repeated again and again as conventional wisdom.”
That said, the 1990s was also notable for the Tech Boom. Asness’ research shows that the height of the Tech Bubble in 1999 was the year when removing the Top 5 and 10 stocks in the S&P500 would have had the most impact. Therefore, others may wish to take away another lesson, which is to diversify themselves more widely across asset classes and geographies to avoid concentration risks and not to rely entirely on market cap weighted indices!
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.