FANG – a toothy acronym for Facebook, Amazon, Netflix and Alphabet’s Google – dragged down stock markets this week as a tech sell-off deepened, with Netflix down 4.2 per cent, Facebook down 3.9 percent and Alphabet 1.2 per cent lower on Wall Street late Monday. Many analysts expect worse.
The tech megacaps are down 10 percent since Facebook’s earnings disappointed analysts last week. That’s pulling markets down – and it’s not hard to see why. This chart from Michael Batnick, director of research at Ritholtz Wealth Management, shows how absolutely dominant tech companies have become.
The market capitalisation of the top five S&P500 companies, versus the bottom 282 companies.
It May Get (a lot) Worse
John Hussman, the president of Hussman Investment Trust, this week predicted that stock markets will fall by over 60 percent in a major correction.
“Measured from their highs of early-2018, we presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq-100 Index, -68% for the Russell 2000 index, and nearly -69% for the Dow Jones Industrial Average.”
It’s a bitterly bearish outlook, but having forecast the market collapses of 2000 and 2007-2008, Hussman has credibility.
Most, today, will be watching for Apple’s earnings, which may prove a pivotal moment. The company is startlingly close to hitting a market capitalisation of $1 trillion.
As Chris Puplava notes on Seeking Alpha: “Amazon, Netflix and Microsoft together this year are responsible for 71 percent of S&P 500 returns and for 78 percent of Nasdaq 100 returns. The three stocks make up 35 percent, 21 percent and 15 percent of S&P 500 returns, respectively, while making up 41 percent, 21 percent and 15 percent of Nasdaq 100 returns.”
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Netflix has been among those particularly scrutinised by sceptics of the tech giant growth story. The company’s stock price has climbed over 100 percent in the past year, despite Netflix expecting to burn $3 – $4 billion in cash during 2018 to continue funding content production and analyst concerns about the threat from rivals like Amazon and risk of market saturation.
As Hussman puts it: “The present combination of record valuations and divergent market internals, coming off of the most wicked ‘overvalued, overbought, overbullish’ extremes in history, creates a danger zone that will not be resolved until some combination of those factors – valuations, internals, and overextended conditions – shifts to a less dangerous mix.!
