The S&P 500 is continuing its bull run, beating the slump that it often hits in May. But there’s a troubling imbalance in the index that could be a warning of approaching trouble in the broader market.
You see, the vast majority of recent S&P gains are tied to just 1% of stocks in the index: Facebook, Amazon, Apple, Netflix, and Google (now Alphabet) — often referenced together with the acronym FAANG.
While FAANG stocks are being pumped higher and higher, the rest of the S&P is suffering. Here’s why that’s such an important red flag for savers, and what you can do in response…
S&P Currently Resting on FAANG Stocks’ Shoulders
Over the past 10 weeks, the five FAANG stocks have gained a staggering total market value of $260 billion. But what about the rest of the S&P?
All other stocks in the index fell short. In fact, they lost more market value — all 495 of them — than the five FAANG stocks gained over the same period!
Essentially, that means the S&P is being propped up to a large extent by a very small number of stocks. And it’s the valuation of those stocks that’s propelling the index upward.
But are FAANG stocks really worth their skyrocketing prices? And if not, what does that mean for the S&P and for the market in general?
When the FAANG Bubble Pops…
Clearly, investors have high hopes for the five FAANG stocks. But they may be expecting too much.
The FAANG crew is riding a wave of investor support based less on substance and more on media hype — like Warren Buffett’s utterly self-interested CNBC appearance extolling Apple, in which he has roughly $8 billion invested… or Mark Cuban’s recent conversation with Jim Cramer, where he insists FAANG stocks are still vastly undervalued, two of which are his biggest holdings (Amazon and Netflix).
Out of the five stocks, only one (Netflix) is trading at a positive price-to-earnings ratio. And still, many experts feel it’s grossly overvalued. The others are trading at even more absurd P/E multiples, and getting more expensive by the day.
This trend is in no way sustainable; investors are setting an impossible standard of performance for these stocks. And when traders are ultimately left disappointed — which is an inevitability of a bubble such as this — there will be serious consequences.
As we mentioned earlier, FAANG stocks are carrying the S&P right now. If investors lose faith in those, the rest of the index has nothing to keep it standing. And if the S&P tumbles, there’s a decent chance it will create a domino effect with sell-offs throughout the broader market.
History Lesson: The Nifty Fifty
Take the “Nifty Fifty” as an example.
Back in the 60s and early 70s, there were a group of fifty blue chip stocks that were thought to be invincible. Investors called them “one-decision” equities, because they couldn’t imagine any reason to sell them — only buy, buy, buy.
But guess what? The stocks in the “Nifty Fifty” were far from invincible. And when the stock market tanked later in the 70s, the “Nifty Fifty” actually fared worse than the rest of the market!
It wouldn’t be surprising to see a similar scenario involving today’s FAANG stocks.
The Answer to FAANG Pricing Insanity
Now could be one of the riskiest times for Americans to be exposed to the stock market. If you have savings in any traditional equities whatsoever – even as part of an IRA or 401(k) that you haven’t checked on in a while – the inevitable correction from today’s pricing insanity on stocks like the FAANG crew could be devastating.
But, by owning tangible assets with inherent value – one of the best among them being precious metals like gold — you can guard your savings against the fallout from whatever comes next. And when Wall Street jumps ship from the FAANG bubble and seeks safe haven, it would be a pretty good bet that precious metal prices will soar.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.
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