Stack on Stocks, Bubbles and FANGs

Focus: Strategies

James Stack Image James Stack President, Stack Financial Management

If one didn’t know better, you’d never guess that stocks are in the ninth year of the second longest bull market in Wall Street history. The financial skies are blue with nary a single cloud in sight, observes Jim Stack, money manager and editor of InvesTech Research.

Fearful money that has been on the sidelines for years is now finding its way back into the stock market. In other words, it’s a very comfortable time to be invested. And that, in itself, makes us more nervous.

In a renewed show of solidarity, the broader market indexes are uniformly confirming the recent highs in the S&P 500. However, the new highs in these market indexes are masking some internal divergences, which could be a sign of an overheating market as investors stampede into “growthier” stocks.

One such discrepancy, that has developed this year, is between the Growth and Value segments of the large-cap Russell 1000 Index. In fact, the first quarter of 2017 saw the largest quarterly outperformance by the Growth Index since 2009, and that gap has continued to widen since the end of March.

This growth-value disparity is also apparent within the S&P 500 Index where high momentum stocks have dramatically outperformed their more conservative index counterparts.

Notably, the “FANG” stocks, Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG) have soared to such lofty levels that these four frothy stocks now comprise over 6% weighting of the S&P 500, and have contributed nearly one-quarter of the gain in the S&P 500 since the beginning of 2015!

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The new highs that we’re seeing in the S&P 500 and secondary market indexes are a sign of broad market participation by investors, as well as speculators.