In short, without the US equity market contribution, the entire aggregated performance of the global stock market goes sideways.
So, the US market in 2018 has been the engine of performance for global markets – and looking under the hood of the US equity rally, we can see it is coming from a very select corner of the index.
The Faang stocks are currently being credited with over 80 per cent of the performance of the S&P 500 in 2018 – with Amazon’s share price at $1,876, up 50 per cent year-to-date, and Apple taking first past the post for a $1trn market cap company.
It is alarming that five companies within a global index of over 1,000 are driving 80 per cent of total market performance. Without Facebook, Amazon, Apple, Netflix and Google, our global equity market could, and most likely would, be in disarray.
What does this state of affairs mean for portfolio managers?
Simply put, managers who have spent years constructing diversified portfolios of global investment opportunities have found themselves at the mercy of this concentrated rally – because unless a portfolio is invested meaningfully into the US market and meaningfully into these five stocks (essentially an ETF) it is a good bet it will be struggling.
That said, just because a portfolio appears to be underperforming on a headline level does not mean what it is invested in are poor investments by any means.
If anything, it just illustrates how short-term investor behaviour does not always follow what is logical over the long-term.
Good companies remain good companies irrespective of where the market is moving in the immediate future.
On the flip side, with this level of performance concentration coming from five stocks it could be said we are going through a period of dysfunctional market behaviour in which investors ignore fundamentals in favour of simply chasing what is doing well – with little regard for how much they are paying for the privilege.
The saying: “the bigger they are the harder they fall” seems appropriate here.
The logic of markets is only ever temporarily suspended: the challenge, to paraphrase John Maynard Keynes, is to remain solvent for longer than they remain irrational. Before they correct themselves, however, they tend to become horribly overextended.
A diverse, well-constructed global portfolio will, in the long run, rise to the top.
There are, at most, six more years of President Trump – and it may take a while, but it is not unreasonable to expect through recession, impeachment or a return to normality that the market will de-Faang itself eventually.