Sep 18, 2020 | JONATHAN ELSIGOOD

The US market and the FAAMGs

Investors know that 2020 has been a bumpy ride. We started the year with gains from the global equity markets, which turned to rapid falls as the pandemic swept across the world.

Yet, as we sit here in the early days of Autumn, global markets are more or less back where they were at the start of the year despite the UK lagging behind. That’s why it’s always sensible to have a geographically diversified portfolio.

Across the pond, the US market has experienced a strong bounce back and there’s been no stopping the popular tech-based FAAMG stocks – Facebook, Amazon, Apple, Microsoft and Google.

It can be a challenge to understand the disconnect between what’s happening in the economy and what’s happening in the markets. How can the stocks for these companies be thriving in such turbulent times? Are we experiencing what is known as a ‘bubble’? Let’s unpack that…

What is a stock market bubble?

In simple terms this is when the price of a stock (or group of stocks) rises well above what it’s actually worth and investors are willing to pay more and more for a slice of the future earnings of the company. It usually happens rapidly and can be followed by an equally quick decrease in value.

Why would we be experiencing one?

The FAAMGs have thrived during the pandemic. Zoom is another good example, along with many other tech companies. Some investors will have decided to follow the crowd either to invest in those stocks they think will continue to thrive, or because they have FOMO (the fear of missing out) – this increased activity is what causes the bubble in a stock’s price.

What happens if the bubble bursts?

Financial economists debate whether bubbles actually exist, so it’s important to remember that stock markets naturally go up and down over time. Bubble or no bubble, tech stocks might come down in value in the future. Just take a brief look back at the tech bubble at the end of the 1990s and how that burst shortly into the new millennium, becoming the ‘tech wreck’! But if you’re invested in a broadly diversified portfolio and you’re playing the long game, it won’t be an issue for you.

Beyond the bubble…

If you look outside of the FAAMGs you can see that the returns from the vast majority of US companies is less than stellar, reflecting more closely how many investors feel about the current economic situation.

In fact, 335 stocks in the S&P 500 sit below the market average return for the year (12%). Half of all stocks have actually lost money, as we can see in the chart below.

Returns of US S&P500 stocks in 2020 (to 2nd Sept)

Source: Morningstar Direct

What does this mean for you?

If you have an investment portfolio with CPW, it’s a highly diversified one. You will have avoided the brunt of the stock market falls during the earlier part of the year as the pandemic spread. And if the FAAMGs come off the rails, the same diversification will protect you again!

No one knows what will happen next in the markets, including professional fund managers. If you’re concerned about the investments you hold, now is the time to shout up and get in touch. Be ready for future market changes as the world continues to face challenges, be they from the pandemic, the US presidential election, ongoing US/China trade tension or even Brexit again!

If history tells us anything, it’s that today’s winners are rarely tomorrow’s. So, if you want to sit back with the confidence that future winners sit somewhere in your portfolios, get in touch.

 

Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.

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