FLAG vs. FAANG In The Recent Market Sell-Off
For the past five years, the US domestic bull market has been led by growth stocks, and growth has been led by FAANG. Furthermore, during the 3rd quarter, The AA in FAANG (Apple and Amazon) led FAANG. This means that the already expensive had been getting more expensive, and that even some of the most expensive also got more expensive.
But there are certain risks associated with such divergence between growth and value and between celebrity mega-cap companies and the rest of growth. The risk is that valuations become unsustainable and the market prices become fragile.
That may be what happened during the recent major market sell-off which occurred during October 10th.
Amazon and Apple both sold off more than the markets in general. In other words, the companies which led the market upward actually led the market downward during that week.
The fund which I helped to build, FLAG, focuses on valuation, tilting against ultra-highly-valued stocks, and penalizing stocks which show signs of hyping revenues and goosing earnings. In other words, it has criteria in place designed to detect and avoid hype stocks.
The chart below shows FAANG performing poorly during the five trading days ending on October 11th, the last day of the sell-off. It also shows that only Facebook, the F in FAANG, performed better than FLAG, and barely so.
Facebook had already gone through a major sell-off in the 3rd quarter and was overwhelmingly the worst performer in FAANG in Q3.
The market story, which has been driven for years by the growth story, which has been driven by the FAANG story and by the beginning of this quarter had been reduced largely to an AA story alone, was vulnerable for these very reasons, a narrow range of companies in support. It is likely that the market sell-off was triggered by the fact that two economic reports signaled respectively strong growth and inflation above the Fed’s target rate, which caused a shift in interest rate expectations towards tighter money. Which means even though markets have, as of this writing, rebounded to some degree from the sell-off, they are still vulnerable to monetary tightening.
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.