How Six U.S. Meg-Cap Tech Stocks Buoy Markets
By Matt Schmitts, CFA®
Senior Vice President, Director of Investment Strategy
May 12, 2020Many people have heard reference to the “FANG” stocks leading the U.S. equity markets, but it’s truly hard to appreciate the supernatural gravity this group of tech industry behemoths exert on the market exchanges.
FANG was an acronym that originally referred to Facebook, Apple, Netflix and Google and the leadership that these four stocks had provided to market indexes.
At Commerce Trust, we expanded the group to six companies, adding Amazon and Microsoft for an even longer acronym, FAANGM. The collective weight of this powerhouse group of six stocks has risen from 7% of the S&P 500 market capitalization in 2013 to 17% in 2019. As of April 30th, these six stocks account for more than 20% of the S&P index value. As you can see from these numbers, the FAANGM group increased its dominant position further during the first four months of 2020 as the world battles through the current pandemic. A fiction writer would have been hard-pressed to pen a scenario that would have so easily crippled the global economy while further enhancing the leadership position of these six companies.
Additionally, these six companies represent market capitalization of over $4 trillion and are now bigger than all but two world markets: United States, excluding these six companies, and Japan. This means the combined market capitalization of Facebook, Apple, Amazon, Netflix, Google and Microsoft is greater than that of the respective individual market capitalizations of China, United Kingdom, France, Canada or Germany, as a few examples.
During the first four months of 2020 the performance of this FAANGM basket was a return of 5.5%, which compares very favorably to a return of -9.3% for the S&P 500 during this same time period. Interestingly, the S&P 500 return without these six stocks would have been an even worse -12.4%. This is not a new phenomenon as this FAANGM basket has outperformed the broader S&P 500 market return by 15.8% per year for the past five years ending April 30, 2020. You can see the details of this in the included charts.
Can FAANGM continue its seeming immunity to the coronavirus pandemic? To be sure these companies are uniquely positioned with the digital infrastructure to help the world cope with “shelter in place” restrictions. Many also have strong cash reserves to buy back their own stock. To add some extra context, Jeff Bezos, founder and CEO at Amazon, is on track to become the world’s first trillionaire by the time he is 62, despite the pandemic.
The obvious question is, “What do I do with this information,” and we would tell you, “Nothing.” It is simply important to be aware of the make-up of the broader market. Moreover, one key to understanding the market is to be aware of the impact any one stock or a broader group of stocks can have on market returns. Finally, it is vital to focus on the long-term goals and objectives of your overall portfolio.
About the Author
Matt is the director of equity strategy as well as a portfolio manager for Commerce Trust Company. In addition to his other responsibilities, Matt chairs the equity strategy team, is a member of the investment policy team, and serves as co-manager for the Commerce value, growth, and mid-cap growth strategies. Prior to joining Commerce in 2002, Matt worked as a portfolio manager, an investment specialist, and a financial analyst. Matt received a bachelor of science degree in business administration and business management with an emphasis in finance from Drake University. Matt holds the Chartered Financial Analyst® designation and is a member of both the CFA Society of Kansas City and the CFA Institute.
This material is intended to provide general information only, may be of value to the reader and audience, and is reflective of the opinions of Commerce Trust Company.
Commerce Trust Company is a division of Commerce Bank. Commerce Brokerage Services, Inc., member FINRA and SIPC, and an SEC registered investment advisor, is a subsidiary of Commerce Bank.
This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. The information in this commentary should not be construed as an individual recommendation of any kind. Strategies discussed here in a general manner may not be appropriate for everyone.
Diversification does not guarantee a profit or protect against all risk. Past performance is no guarantee of future results, and the opinions and other information in the investment commentary are as of May 12, 2020.
Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product or specific financial situation. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed, and is subject to change rapidly as additional information regarding global conditions may change. All expressions of opinion are subject to change without notice depending upon worldwide market, economic or political conditions.
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