Markets
The Market Has No Bite Without the “FANG” Stocks [Chart]
The Market Has No Bite Without the “FANG” Stocks [Chart]
Facebook, Amazon, Netflix, and Google created over $440 in value over 2015
The Chart of the Week is a weekly Visual Capitalist feature on Fridays.
In the sixth year of the bull run, the U.S. large cap market has had its ups and downs. The S&P 500 peaked at 2134.7 in the early summer months, and promptly collapsed to 1867 points during the August flash crash.
Today, it’s back in black, but only trading just over 1% higher than it started the year.
The only reason that has made this possible is the legendary performance of four tech stocks: Facebook, Amazon, Netflix, and Google (now called “Alphabet Inc.”). Together, the “FANG” stocks have created an impressive $440 billion in market capitalization since January.
For comparisons sake: that’s over 2/3 the size of Apple’s current market cap.
The FANG stocks comprised just over 3.5% of the weight of the S&P 500 index at the beginning of the year, and now they make up 5.1%. They’ve carried the market, and without them the S&P 500 would surely be in negative territory today.
Looking at these companies individually, probably Amazon (AMZN) has been the most impressive over the course of the year. While it didn’t shoot up the 143% that Netflix (NFLX) did, Amazon had a similar performance despite being over 6x the size of Netflix. Amazon is now bigger than Facebook in terms of market cap, and achieved a gain of 116% through the year.
The only problem is that it is now the most expensive stock on the index, at a seemingly ludicrous P/E ratio of 966. The other stocks are expensive as well: Netflix and Facebook are trading at 329 and 108 times earnings respectively. Google is the lone palatable company from that perspective, trading at only 35 times earnings.
This raises the question of how long the FANG stocks can carry the load, and if their work is done.
If so, who will step up to the plate?
Markets
How Disinflation Could Affect Company Financing
History signals that after a period of slowing inflation—also known as disinflation—debt and equity issuance expands.
How Disinflation Could Affect Company Financing
The macroeconomic environment is shifting. Since the second half of 2022, the pace of U.S. inflation has been dropping.
We explore how this disinflation may affect company financing in Part 2 of our Understanding Market Trends series from Citizens.
Disinflation vs. Deflation
The last time inflation climbed above 9% and then dropped was in the early 1980’s.
| Time Period | March 1980-July 1983 | June 2022-April 2023* |
|---|---|---|
| Inflation at Start of Cycle | 14.8% | 9.1% |
| Inflation at End of Cycle | 2.5% | 4.9% |
* The June 2022-April 2023 cycle is ongoing. Source: Federal Reserve. Inflation is based on the Consumer Price Index.
A decrease in the rate of inflation is known as disinflation. It differs from deflation, which is a negative inflation rate like the U.S. experienced at the end of the Global Financial Crisis in 2009.
How might slowing inflation affect the amount of debt and equity available to companies?
Looking to History
There are many factors that influence capital markets, such as technological advances, monetary policy, and regulatory changes.
With this caveat in mind, history signals that both debt and equity issuance expand after a period of disinflation.
Equity Issuance
Companies issued low levels of stock during the ‘80s disinflation period, but issuance later rose nearly 300% in 1983.
| Year | Deal Value |
|---|---|
| 1980 | $2.6B |
| 1981 | $5.0B |
| 1982 | $3.6B |
| 1983 | $13.5B |
| 1984 | $2.5B |
| 1985 | $12.0B |
| 1986 | $24.2B |
| 1987 | $24.9B |
| 1988 | $16.9B |
| 1989 | $12.9B |
| 1990 | $13.4B |
| 1991 | $45.2B |
| 1992 | $50.3B |
| 1993 | $95.3B |
| 1994 | $63.7B |
| 1995 | $79.7B |
| 1996 | $108.7B |
| 1997 | $106.5B |
| 1998 | $97.0B |
| 1999 | $142.8B |
| 2000 | $156.5B |
Source: Bloomberg. U.S. public equity issuance dollar volume that includes both initial and follow-on offerings and excludes convertibles.
Issuance grew quickly in the years that followed. Other factors also influenced issuance, such as the macroeconomic expansion, productivity growth, and the dotcom boom of the ‘90s.
Debt Issuance
Similarly, companies issued low debt during the ‘80s disinflation, but levels began to increase substantially in later years.
| Year | Deal Value | Interest Rate |
|---|---|---|
| 1980 | $4.5B | 11.4% |
| 1981 | $6.7B | 13.9% |
| 1982 | $14.5B | 13.0% |
| 1983 | $8.1B | 11.1% |
| 1984 | $25.7B | 12.5% |
| 1985 | $46.4B | 10.6% |
| 1986 | $47.1B | 7.7% |
| 1987 | $26.4B | 8.4% |
| 1988 | $24.7B | 8.9% |
| 1989 | $29.9B | 8.5% |
| 1990 | $40.2B | 8.6% |
| 1991 | $41.6B | 7.9% |
| 1992 | $50.0B | 7.0% |
| 1993 | $487.8B | 5.9% |
| 1994 | $526.4B | 7.1% |
| 1995 | $632.7B | 6.6% |
| 1996 | $906.0B | 6.4% |
| 1997 | $1.3T | 6.4% |
| 1998 | $1.8T | 5.3% |
| 1999 | $1.8T | 5.7% |
| 2000 | $2.8T | 6.0% |
Source: Dealogic, Federal Reserve. Data reflects U.S. debt issuance dollar volume across several deal types including: Asset Backed Securities, U.S. Agency, Non-U.S. Agency, High Yield, Investment Grade, Government Backed, Mortgage Backed, Medium Term Notes, Covered Bonds, Preferreds, and Supranational. Interest Rate is the 10 Year Treasury Yield.
As interest rates dropped and debt capital markets matured, issuing debt became cheaper and corporations seized this opportunity.
It’s worth noting that debt issuance was also impacted by other factors, like the maturity of the high-yield debt market and growth in non-bank lenders such as hedge funds and pension funds.
Then vs. Now
Could the U.S. see levels of capital financing similar to what happened during the ‘80s disinflation? There are many economic differences between then and now.
Consider how various indicators differed 10 months into each disinflationary period.
| January 1981 | April 2023* | |
|---|---|---|
| Inflation Rate Annual | 11.8% | 4.9% |
| Inflation Expectations Next 12 Months | 9.5% | 4.5% |
| Interest Rate 10-Yr Treasury Yield | 12.6% | 3.7% |
| Unemployment Rate Seasonally Adjusted | 7.5% | 3.4% |
| Nominal Wage Growth Annual, Seasonally Adjusted | 9.3% | 5.0% |
| After-Tax Corporate Profits As Share of Gross Value Added | 9.1% | 13.8% |
* Data for inflation expectations and interest rate is as of May 2023, data for corporate profits is as of Q4 1980 and Q1 2023. Inflation is a year-over-year inflation rate based on the Consumer Price Index. Source: Federal Reserve.
The U.S. economy is in a better position when it comes to factors like inflation, unemployment, and corporate profits. On the other hand, fears of an upcoming recession and turmoil in the banking sector have led to volatility.
What to Consider During Disinflation
Amid uncertainty in financial markets, lenders and investors may be more cautious. Companies will need to be strategic about how they approach capital financing.
- High-quality, profitable companies could be well positioned for IPOs as investors are placing more focus on cash flow.
- High-growth companies could face fewer options as lenders become more selective and could consider alternative forms of equity and private debt.
- Companies with lower credit ratings could find debt more expensive as lenders charge higher rates to account for market volatility.
In uncertain times, it’s critical for businesses to work with the right advisor to find—and take advantage of—financing opportunities.
Learn more about working with Citizens.
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