$1 Trillion: Is That the Right Figure?

That is the loss sustained by the FAANG (Facebook, Apple, Amazon, Netflix and Google) shares since their high this year. All these companies’ shares fell in a bear market, meaning a drop of at least 20 percent.

Whenever there is turmoil in the American stock markets, tune in to the financial TV channel CNBC, which has the best feel for the joys, disappointments and sorrows that go on in the markets. On Tuesday, Nov. 20, this figure grabbed big headlines: $1 trillion. That’s a thousand billions, about twice the gross domestic product of Belgium. These are the losses sustained by FAANG shares since their high this year: Facebook down 30 percent (-$250 billion), Apple down 3.8 percent (-$250 billion), Netflix down 6 percent (-$60 billion) and Google down 4 percent (-$160 billion). It is a big boomerang effect for the “FAANGtastics.” Since the beginning of the year, Facebook has lost over 25 percent, while Amazon, despite its recent drop of nearly 30 percent, maintains a price-earnings ratio of a remarkably high 85.

To some, all this suggests a parallel with the dot-com bubble around 2000. The comparison appears tempting, but it is deceptive, since none of the dot-coms offered earnings back then. The FAANGs, by contrast, offer very generous earnings on their shares. For them, however, what has changed is the economic and political situation in which they operate. The bull, Wall Street’s symbol of a rising market, showed signs of tiredness after 10 years of growth. Also, interest rate hikes are a burden on the stock markets. Lastly, the global slowdown, especially aggravated by Donald Trump’s trade sanctions, is beginning to affect Apple’s sales, so that it no longer announces its smartphone sales figures, just its revenue. From a more political angle, Facebook has undergone multiple major scandals, and Google has been penalized by European anti-monopoly regulators.

Their Best Years

The tech giants would logically expect to be ever more attacked over their semi-monopoly status and their means of tax avoidance, which is why it is dangerous to speculate about them based on their past earnings. It is in fact quite possible that the FAANGs are past their prime.

This is the opinion at Schroders, which emphasizes increasing signs that growth stocks, like technologies themselves, are beginning to lose their leading position in the face of profits by value stocks. Schroders managers Robin McDonald and Marcus Brookes note that in a bull market, investors make the most money at the beginning of a cycle, when confidence and growth are strongly driven, as well as at the end of a cycle, when investors’ optimism eclipses all other considerations. If a survey of international managers by Bank of America Merrill Lynch is to be believed, in recent months the FAANGs have been the most sought-after market segment for investment. They are where everybody wants to take a position, at any cost.

According to Schroders, caution is the best bet when three factors converge: extremely high share prices, equally high expectations and a concentration of capital. This is where we are now; over the past 18 months, the market capitalization of American companies grew by $6 trillion. The tech segment constituted half of that amount, and the shares of the five FAANGs constituted half of that. So much money concentrated in so few stocks is typical of the end of a cycle, when overly high expectations dominate consideration of fundamentals. This is the point where the market corrects.

What to expect next? After a short Thanksgiving week when the American indexes lost an average 4 percent, Nasdaq has shown nothing but a very weak uptick of 0.5 percent this year, while the Dow Jones and the S&P 500 have slid into the red (down 1.7 percent and 1.5 percent respectively).

The most optimistic people hope that the Federal Reserve will take the markets’ volatility into account and stop raising its key rates, but this is doubtful. Others trust that the Black Friday sales after Thanksgiving will give the famous end-of-year rally a boost. In this rather gloomy situation, though, it would be quite an accomplishment if all the American indexes finished the year in the green.