The stock market has had previous top heavy periods with the largest companies accounting for a majority of the gains but in 2020 this pattern is even more pronounced. With such a few companies making up most of the growth, how healthy is this for the market overall and how much risk does this represent for investors?
An acronym that carries a lot of weight these days is FAAANM. FAAANM refers to six high octane technology growth stocks within the S&P 500 Index, specifically Facebook, Apple, Alphabet, Amazon, Netflix, and Microsoft. Looking at a hypothetical $1M investment in these 6 stocks demonstrates the strong trajectory of growth they have enjoyed over a 5 year period as well as YTD when compared against the S&P 500 Index with and without those stocks as well as the MSCI ACWI EX US Index an Russell 1000 Growth Index.
The story of these 6 tech companies is truly astounding particularly in light of the volatility experienced due to the COVID-19 Global Pandemic. Some say that the pandemic has created a rift where larger companies are able to dominate and innovate while smaller companies struggle to survive or simply don't have the budgets to adapt their business models in such a short time.
Growth of $1M - FAAANM (12/31/14 - 10/31/20)
Growth of $1M - FAAANM (12/31/19 - 10/31/20)
There are few charts that illustrate top heavy, concentrated risk as much as the story of the 2020 stock market. We believe that charts like these are great conversation starters for investors and advisors. What do you think?
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Large-capitalization companies may underperform small- and medium-capitalization companies when stocks of large-capitalization companies are out of favor.
The MSCI All Country World ex-USA Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. Please go to msci.com for most current list of countries represented by the index.
The S&P 500® Index is a capitalization-weighted index of 500 stocks. The S&P 500® Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500® Index is proprietary data of Standard & Poor’s, a division of McGraw-Hill Companies, Inc. All rights reserved.
The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values.
The indices are unmanaged, are not available for investment, and do not incur expenses.
FAAANM refers to six stocks within the S&P 500 Index. Facebook, Apple, Alphabet, Amazon, Netflix, and Microsoft.