Caroline Ritchie: Market reliant on netertainment

Caroline Ritchie.

Last year, which in investment time now seems ages ago, everyone was clamouring for something called FANG. You could hardly move for all the banging on about FANG and how much one was or was not getting. FANG is an acronym of four stocks: Facebook, Amazon, Netflix and Google (now properly called Alphabet).

There was good reason to slobber all over them, then -- they have consistently, until very recently, been rewarding punters with fabulous returns. They absolutely shone in 2015, with investors licking up earnings announcements like candies from on high.

Netflix rose 18 per cent, Google shot up 16 per cent and Amazon spiked 15 per cent immediately after their respective numbers came out. Facebook, though it didn't explode at reporting time and had a wee wobble halfway through, still finished brilliantly.

If you are thinking, well, that's glorious but who cares, there must be a bunch of profitable tech stocks making paper wealth out there, you are right, but there is a difference.

Combined, FANG are gigantic, with just over USD$1 trillion dollars ($1.5 trillion) in total market capitalisation. They are big enough, with their cool products and shooting star ticker prices, to move the whole market around. There are lots of other enormous companies listed in the USA, no question. But when few of them soar like these ones did, you get some interesting effects.

The first is the obvious one -- fund managers and commentators fall in love with them, for they are so profitable. And the higher they climb, the louder the screeching and enjoyment from the sidelines as others clamber in to hitch themselves to the fun. They are also tech stocks, which are cool, and there is nothing that market commentators like more than sectors such as these where anything seems possible if only you can write the software fast enough. Humans like indulging in wild dreams and these kind of shares can deliver in droves.

So, a lot of focus last year went on the ever-winning FANG. Lots of other things slipped past, stage left.

The second was that while FANG were busy keeping investors happy and fund managers in steak dinners, the S&P 500 wasn't actually up to much. In fact, if you separate out the FANG from everything else, the index went backwards.

As a whole, the S&P 500 went nowhere for 2015, in fact it finished just a smidge in the red. Remove FANG, you would have had an index that finished at minus FOUR per cent for 2015. Minus four per cent is a hefty number and a large reversal of fortune from 2014. But this "true" return has been masked behind a mere four names which are apparently doing all the heavy lifting in the big boys' sandpit. Remarkable, when you consider that there are approximately 4400 companies listed on all of America's exchanges.

What I do wonder, however, is what happens when a select handful of such companies are not there to save our indexing day. This is just a theory, but say, for example, that our treasured four are overvalued. Or something goes wrong and Nasdaq investing suddenly seems a bit risky. After all, that has happened before.

If the S&P 500 was barely above water when the golden quartet were going at full steam -- what do things look like when they do not? It has been a great coat tails ride so far, but magic carpets do not levitate forever.

Ok, maybe that is a bit harsh, but supernormal share prices do not just hang about for the sake of it, and the technology sector is the most fickle mistress of all.

FANG, beloved though we made it all last year, could just turn around and bite us in the neck.

Caroline Ritchie is a former AFA, sharebroker & portfolio manager. She runs Investment Stuff, an investment coaching service. Visit her at www.investmentstuff.co.nz. Statements in this column are not financial advice.