Nov 10, 2022 4 min read

This year has been a major challenge for the stock market. The long running bull market turned into a bear which meant at least a 20% drop in value. Lately we have seen some recovery, but there is no guarantee that we might not retest earlier lows.

If you look at a chart of stock market performance for many decades, there was very little growth.

There was a fairly big increase by historical standards in the late 1980 and 1990s. This increase in value was fueled by the end of defined benefit pensions for many people and the introduction of the 401(k). Suddenly many more people were buying stocks so this drove up market values.

After 2008, the market just exploded and went to values never witnessed before. A large amount of this growth came from the so-called FANG stocks. These high-tech companies including Facebook, Apple, Netflix, Google, Amazon, Microsoft and a few others dominated valuations.

Sometimes these companies introduced market disruptors. Amazon sold everything imageable online and was able to force brick and mortar retailers to close. Facebook created a social media platform and then used all of the information they had from users to sell advertisements. Google developed search engines and then was able to direct a user’s browser to the highest bidder.

These companies had tremendous cash flow, and many investors believed the traditional rule for investing did not apply to them. They achieved price earnings ratio multiple not previously seen. There were several other factors that produced this rapid valuation.

The Federal Reserve had a zero-interest rate environment in place from the end of the 2008 recession. This meant that investors had to take on more risk to get any return, which made more money flow into the market. Because these companies had good cash flow and interest rates were low, they borrowed over $500 billion to repurchase their own stock. This did not help the economy but it boosted share prices and made investments look better. Pavilion Global Markets estimated that buybacks pushed the indexes to 4,600 instead of approximately 2,700 without. These purchases created “artificial buyers.”

There were also many passive investors. Many of the largest mutual funds and Exchange Traded Funds owned large quantities of these FANG stocks. This made the prices soar even more. This meant that even more money flowed into the FANG companies driving up prices further.

It is important to remember that most market indexes, except for the Dow Jones Industrial Average, are weighted by market capitalization. This means that companies with more shares outstanding at higher prices represent a disproportionate amount of the index. The top 10 stocks out of 500 represent almost one-third of the entire index.

It has been the perfect world for these FANG stocks that is likely not going to be repeated. Inflation was low until this year and interest rates were near zero. Since the bear market began earlier this year, the FANG stocks have been some of the worst performers. Facebook (now Meta) is down roughly 73%. They are not alone. This week they announced over 10,000 layoffs.

Many investors have been spoiled and think we will go back to getting large returns like we had the past decade. That is probably unrealistic. The financial environment will not be the same, there will likely be more anti-trust regulations, and the law of large numbers will come into play.

You must have a realistic investment plan and manage risk and all of the other elements of good financial planning.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.