There are a lot of big stories this year! As you might expect, all of them are interrelated like high inflation, high interest rates, tightening Fed, Russia/Ukraine war, and weak stock and bond markets. One of the most interesting underlying facets of this most troubling year is the performance of growth stocks, in general, and the performance of the “FAANG” stocks, in particular.
The “FAANG” stocks were coined when a few high-flying growth stocks started putting up very high total return numbers. The FAANG stocks were Facebook (now Meta, META), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (now Alphabet, GOOG). These stocks were not only producing high returns for their investors but were also growing to be some of the largest market capitalization stocks in the U.S.
But, oh how the mighty have fallen (mostly, except Apple)! As seen from the chart below, the good times are now a distant memory. Over the past 24 months, four of the FAANGs have struggled off their recent highs with significant “drawdowns”, i.e. recent peak-to-trough. Certainly, Facebook/Meta, Amazon, and Netflix all show very large negative average annual returns of -31.6%, -15.1%, and -21.8%, respectively, over the past two years, but the drawdowns of -66.8%, -45.2%, -53.4%, respectively, and -37.1% for Google, are especially telling of the risk embedded in those stocks. Over this time horizon, the S&P 500 (IVV, the green line) showed an average annual total return of +7.7% with a drawdown of only -24.5%, while Apple, the best-performing FAANG, is actually up +14.6% with a drawdown of only -28.3%.
All of the FAANG stocks are included in the S&P 500, so those weak recent returns are part of the performance of the index. In fact, in order to be properly diversified, it makes sense to have had some exposure to this group while they were in their high-flying stage because over a LONG time horizon these stocks have supported positive index returns (except Facebook/Meta, that recently showed very significant idiosyncratic weakness due to a strategic shift in their business).
So, this is just another example of how being a diversified long term investor is to your benefit. It was mathematically infeasible for those stocks to have continued at the growth pace they put up early in their formative years, but no one could guess when the growth would slow; or when it might pick up again? Historically, owning a well-balanced portfolio of high-quality stocks and bonds captures the go-go years, as well as the “off” years, that has netted out to positive market returns over a long time horizon.