Remember the BRICS, now we have FANG!

It was only 6-8 years ago that stories about the BRIC (Brazil, Russia, India and China) countries becoming the dominant economies were front and center on most financial news broadcasts.  Investors willingly followed the talking heads’ advice and pulled money out of US investments in order to join the party in emerging markets – at exactly the wrong time.  Today, we are dealing with a similar theme, just with a different set of investments.  Investors are now talking about and investing in the FANGs (Facebook, Amazon, Netflix, and Google) and the Nifty Nine.  When you read about acronyms like “FANG” or alliterations such as the “Nifty Nine”, you know we are not in a very healthy financial environment.  As one of the financial analysts that we like to follow (Bob Farrell) says: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names”.

Last year was actually a fairly bad year for most assets.  All US stock categories were negative except for large company growth stocks (and if you take out the nifty nine, large cap growth was down as well).  The broader stock market faired even more poorly with the equally weighted Value Line Composite stock index down more than 11% in 2015.  Below is a synopsis of last year’s market provided by Mutual Fund Observer.  It shows the categories of different asset classes and how many were negative.   As you will see, only one category of US stocks did well and only one bond category out of 15 made money.   You read that right; most bond funds were negative for 2015.

Number in each category negative for 2015

• 8 of 9 domestic equity categories, excluding large growth
• 17 of 17 asset allocation categories, from retirement income to tactical allocation
• 8 of 15 international stock categories
• 14 of 15 taxable bond categories and
• 6 of 6 alternative or hedged fund categories

What does this mean for portfolios?

Fads come and go not only in fashion, but in investments as well.  We know these are great companies (just like Cisco and Intel were in 2000), but the FANGs are an overcrowded and overvalued trade and when the herd mentality shifts, these stocks can get hit pretty hard.  We believe that 2016 will be a year of continued volatility brought driven by world events.  Events like Saudi Arabia executing a Shia Iman will stoke more tension in the Middle East.  We believe undervalued asset classes (energy and emerging markets) will significantly outperform overvalued large US growth companies like FANG.

On a lighter note, we are hoping next Saturday is not Ground Hog Day for the Bengals and we can actually win a playoff game, and maybe even end up winning the Super Bowl.