September's Stock Slide Won't De-FANG This Bull Market

Tech is tanking, so bye-bye bull market—that’s logic many pundits peddled ever since the FANGs and big name Tech stocks started September’s swoon. They claim Tech fueled the market’s post-March rise--so what kills Tech, kills this young bull market, too. It sounds compelling. But it’s wrong. This global rebound—and Tech’s leadership in it—is far more durable than most fathom. Here’s why.

Yes, already leading pre-COVID, Tech’s strong balance sheets and cash flows cushioned the contraction’s blow. Then, too, Tech’s business models synced seamlessly with a socially distanced, heavily virtual world.Hence, Tech stocks outperformed in the winter’s bear market—and soared in the rebound. They surged 80.5% from March 23’s low through September 2’s recent high, trouncing global stocks’ 56.9% rise. The Tech-like FANGs—Facebook, Amazon, Netflix and Google—zoomed, too. Given that America totals nearly 90% of the global Tech sector’s market cap and has all four FANGs, US stock indices shined.

Since then, the Tech-led selloff has pessimists crowing. These doubters, infected with the confirmation bias I detailed here in June, see only negatives reinforcing their views. They envision stocks as “exhausted” after a torrid five months. But that isn’t how markets work.

There have been 34 prior five-continuous-month streaks of S&P 500 gains since 1928. Most followed bear market or correction lows—like now. After these runs, returns were positive in over 80% of the next 6, 12 and 18 month periods—way above average. When the five-month rally topped 25%—like now—stocks climbed in 100% of subsequent 18-month periods. Gains ahead aren’t automatic. But bears’ “exhaustion” argument? It’s bunk.

The fact is: this bull market is big and broad. Focusing just on Tech misses that all 11 S&P 500 sectors are up more than 30% from March lows. All but nine S&P 500 stocks have risen since then—443 by at least 20%. It’s even true of small caps—88.4% of continuously listed Russell 2000 constituents are up since the global low.

Contrary to common belief, this bull market isn’t all about America, either. It’s global. Strip out America’s Tech and FANG advantage, and the S&P 500 gained 45.7% since the global low. Continental Europe? It’s a hair better—up 46.5%, excluding its minor Tech sector. And 96% of continental European stocks are up since then—nearly three-quarters by over 30%. These big, broad-based gains are normal early in bull markets, as stocks begin peering beyond near-term troubles and toward a better far-future.

Leadership volatility is perfectly normal, too. Despite its big 2020, this is Tech’s third bout of lagging this year. The sector also plunged -21.4% from September 2018 to early January 2019. That was no signal to sell Tech. What makes this recent swing different?  Precious little.

Corrections aren’t unusual, either. Yes, even this early. Three postwar bull markets—those starting in 1962, 1974 and 2002—had earlier corrections. All three bull markets ran for at least another three years after those corrections ended.

But don’t expect Big Tech and other huge growth stocks to lag long. Yes, small value stocks usually bounce big early in bull markets. They’re typically more leveraged than large growth firms, so lenders shun them as long, brutal recessions wear on—leaving small value companies fighting for survival. When credit finally thaws, a small value relief rally leads markets higher.

As I explained in my September 2 column, don’t expect that bounce this time. The winter’s shutdowns forced stocks to price in recession in mere days. Small value never suffered the sustained beating that typically tees up its early bull market surge—and current conditions hamper the category. Central banks’ massive quantitative easing programs choke long rates, compressing interest rate spreads and keeping lenders loan leery of lower-quality value firms.

That keeps favoring Tech and growth stocks—and by extension the US. At 2020’s start, 27 of the world’s 33 mega-cap stocks—those exceeding the global stock market’s roughly $200 billion weighted-average market capitalization—were American. Nine are the FANGs and Tech. But building a strong portfolio means you can’t own only the primo leaders. Tech is merely 21% of the developed world’s market cap. So a big part of your diversified portfolio should be non-Tech.

Which is just fine—there’s plenty of positivity to go around in this bull market. Claims that it’s perched precariously on a few big winners are false, bullishly adding bricks to the upturn’s wall of worry. Tech and the US should resume leadership, but expect big, broad, global gains.