Style And Asset Class Rotation Is Taking Place

For nearly three trading weeks the S&P 500 Index has traded mostly sideways, somewhat expected after the fast start to 2021, i.e., the S&P 500 Index up over 11% through the end of April. Under the surface, though the trading is has not been so subdued. Several important trends are taking place investors might want to take note of. First of all the so-called FANG trade has lagged the broader market since the beginning of September. The below chart displays the FANGMA stocks, i.e., Facebook (FB), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOGL), Microsoft (MSFT) and Apple (AAPL) compared to the S&P 500 Index since September 1, 2020. The only FANGMA stock beating the Index is Alphabet with the other FANGMA stocks trailing the S&P 500 Index by double digits.

fangs with S&P 500 Index

These mega-cap growth stocks have been a favorite of investors for the last eight or more years with each outperforming the broader market S&P 500 Index by a wide margin. With the FANGMA's lagging the market now, a rotation seems to be underway.

In the chart below the blue line represents the average return of these six FANGMA stocks compared to some additional asset classes. The red line on the chart represents the small-cap iShare Russell 2000 ETF (IWM) and the pink line is the iShare Core S&P Mid-Cap ETF (IJH). Both of these asset classes are far outpacing the average return of the FANGMA basket and outpacing the S&P 500 Index. This type of rotation is healthy for the market as a broader group of stocks are participating in the market's move higher.

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FANGMA stocks with small and mid cap stock indexes May 4, 2021

The stocks in the FANGMA basket tend to be classified as growth stocks versus value stocks. Since the end of the 2008/2009 financial crisis, pure growth stocks have outperformed pure value.  Again, since September 1, 2020, the Pure Value Style (RPV) has far outpaced Pure Growth (RPG). The below chart clearing shows this with the S&P 500 Pure Value Index returning 54.7% versus the Pure Growth Index counterpart returning14.5%.

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Disclaimer: The information and content should not be construed as a recommendation to invest or trade in any type of security. Neither the information nor any opinion expressed constitutes a ...

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