For years, investors focused on the FAANG stocks to get a sense of how market sentiment shaped up. Now there’s a few new acronyms that could be worth getting to know.
A decade or two ago, you could keep tabs on market performance and investor sentiment just by tracking a few major indices and maybe some S&P 500 sectors. That might not be good enough any more.
Over the last couple of years, focus shifted away from the forest and toward the trees. An emerging handful of smaller stock baskets that include some of the most closely-watched corporate names can arguably help serve as barometers for market, investor and economic sentiment better than the clunky big indices.
Luckily, the new baskets have catchy names that make them easy to remember.
One of them, of course, is the “FAANG” group. Unless you’ve been hibernating since around 2012, you’ve probably heard of this well-known basket of stocks. It consists of Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL).
FAANG became a watchword in the mid-2010s as Technology shares ran up huge gains to outpace most of the market. These five stocks had so much influence (with 28% of the S&P 500’s market capitalization at the end of 2018, according to Forbes) that analysts coined the “FAANG” name for them, and the New York Stock Exchange even has a “FAANG” index you can track.
On a lot of days back in the 2016-2018 period, you could get a better sense of how the market was doing by looking at those five stocks than arguably any other way. Where they went, the market often followed.
It’s not the first time that baskets of influential stocks stepped onto center stage. Older investors probably remember the so-called “Nifty-50” names of the 1960s and 1970s. The difference is that today’s baskets are even smaller and arguably allow investors to really hone in on sentiment.
For instance, when the markets dramatically plunged in late 2018, FAANGs led the way down as investors quickly shed positions in those formerly high-flying five stocks. Weakness in the FAANGs arguably had an outsized influence as the S&P 500 (SPX) fell nearly 20% by Christmas Eve.
FAANGS seem so 2016 now. Have you heard of MVPs? Or WATCH?
These and other acronyms are arguably worth getting to know as FAANGs lose a bit of the influence they held a few years ago. Privacy issues, government investigations into accusations of antitrust violations, and growing competition dogged some of the FAANGs in 2019. It also means they were responding to different issues, rather than trading like one big group. This makes it harder to see them as a one-track story driving the market.
As FAANGs fell in late 2018, investors could get a sense of exactly where people were running for cover not by following broad sectors like Consumer Staples or Utilities, but instead by focusing on a very small handful of stocks that seemed to weather the storm quite well.
This tiny basket of stocks, which unfortunately lacks a clever acronym, might be thought of as “Shave and a Soda,” and consists of CocaCola (KO), PepsiCo (PEP), and Procter & Gamble (PG).
“One of the most surprising things about last year’s Q4 collapse was the strength of PEP, KO, and PG,” said JJ Kinahan, Chief Market Strategist, TD Ameritrade. “These stocks continued to perform pretty well in bad markets. The FAANG stocks play was clearly over, but the new hideout became PEP, KO, and PG.
“People were looking to blue-chip, steady stocks if they didn’t want to go to bonds,” Kinahan continued. “Old-school stocks are what people want in times of uncertainty, and these three have stable products and pay dividends.”
During that rocky quarter, PEP and KO shares were roughly steady, while PG actually rose 10%. The SPX fell 20% between late September and late December.
Now let’s take a look at some other popular baskets.
You could track U.S. consumer health by keeping an eye on the S&P 500 Consumer Discretionary or Consumer Staples sectors, but those are really wide. They include lots of companies that might be doing a great job, but don’t necessarily reflect the core of the U.S. consumer and what they’re doing.
That’s why more analysts lately are talking about WATCH. It stands for Walmart (WMT), Amazon (AMZN), Target (TGT), Costco (COST), and Home Depot (HD). Sure, this index leaves out a lot of big players, but the group of five—perhaps the retail equivalent of the FAANG stocks—is now one many investors well, “watch” closely.
In 2019, these names started to look like outperformers compared to some legacy retailers, particularly those in the department store and casual fashion sectors. It seems like more people are buying their clothes on those shopping trips to the grocery store or over the Internet rather than heading to the mall.
The five stocks—WMT, AMZN, TGT, COST, HD—are all big-box, mostly discount retailers, and go head-to-head to compete for what the industry refers to as “share of wallet.” Between the five, you’re talking more than $1 trillion in annual revenue, so it’s probably fair to say that incorporates a big chunk of overall U.S. consumer spending on everything from Christmas gifts to groceries to clothing to household items like washing machines and televisions.
This doesn’t mean the five stocks always trade right in sync. As the chart below shows, WMT has been by far the strongest over the last two years, though all are up pretty solidly. It’s also clear from the chart that in last year’s Q4, when economic worries flashed, all five lost a lot of ground.
Consumer sentiment means a lot for retailers, so looking at the performance of WATCH, like following the Conference Board’s Consumer Confidence reports, could give you another perspective on how the consumer is doing. Remember, consumer spending drives about 70% of the U.S. economy.
To really dive into consumers’ wallets, it helps to know what they’re doing with the contents. That is, with their credit cards. It goes beyond cards, however, in these days of instant pay. The online payment companies like PayPal (PYPL) and Square (SQ) are also part of this.
The full name for the payment basket is MVP, which stands for MasterCard (MA), Visa (V), and PYPL. That’s not really the full scope, because you also have SQ and American Express (AXP) in the mix, but their names aren’t included in the acronym. Sometimes life isn’t fair.
When consumers feel positive about the economy, they tend to buy more things with credit. This includes items they get at the WATCH stores, but also all sorts of stuff you’d never pick up at a WATCH. Think about all the transactions people make between themselves using PYPL or SQ, for instance. If you buy anything from a private seller online, you’re probably using an MVP to make it happen.
If you buy airline tickets or gasoline, or if you put your car payments on a credit card, MVP would also pick that up. You can’t buy those things at AMZN or WMT (not yet, anyway).
That’s why more analysts are starting to look closely at MVP results, because they reflect wider consumer spending arguably better than just about anything else in this increasingly cashless society.
Everything so far has been domestic, but what if you want to monitor some key foreign stocks? That’s when BAT comes in handy. It stands for Baidu (BIDU), Alibaba (BABA), and Tencent (TCEHY), three of the most closely watched Chinese stocks.
“This is a small grouping that’s viewed as a trade proxy on the ebb and flow of what the market thinks about China in a number of respects, whether related to trade or to China’s economy itself,” said Patrick O’Hare, Chief Market Analyst, Briefing.com. “It’s a mini version of the FAANG trade, but as it relates to the largest companies in China.”
Another twist on FAANG is MANA, like “mana from heaven,” O’Hare said. It groups Microsoft (MSFT) with AAPL, NFLX, and AMZN.
We’ve talked a lot about acronyms that measure consumer demand, which is fine. But business demand is another major part of the global economy. To measure that, people used to look at steel, aluminum, mining, oil, and paper companies, among others.
Those still work, and watching the Industrials, Energy, and Materials sectors of the SPX all can tell you something about corporate health. Increasingly, however, investors keep an eye on the SOX. The SOX has been around for a while, and you can actually follow it on the thinkorswim® platform from TD Ameritrade. Just go to the charts section and enter SOX.
The stocks in SOX are semiconductors, part of the Philadelphia Semiconductor Index. It’s a capitalization-weighted index composed of 30 semiconductor companies created by the Philadelphia Stock Exchange in 1993.
As a reminder, semiconductors provide the ingredient technologies for personal computers, tablets, smartphones and other gadgets. They run communications networks and the internet, and underpin so-called “smart” technology improvements to televisions, home appliances, automobiles and other devices.
Some analysts think the “semis” have taken the “market canary” mantle from the so-called FAANG stocks over the last year as FAANGs go in different directions from each other.
“When you’re counting up the things people need every day, a lot of it is now technology-related. Those core needs, including semiconductors, are part of the infrastructure for most companies, and they won’t necessarily be able to function without them even in a recession,” Kinahan said.
That’s why semiconductors have become what one Wall Street analyst recently called the “backbone” of tech and a great barometer for business health. When companies want to expand, one of the first things they’ll often need is more of the products run by semiconductors.
Because semiconductor makers have a huge business in China and are caught up in the controversy over Chinese tech company Huawei, the sector also arguably serves as the top barometer for U.S./China trade relations.
As a reminder of how SOX can reflect the trade situation, it fell 20% between mid-April and late-May of this year following the breakdown of talks between the U.S. and China. In September, SOX led the charge higher as hopes for a trade breakthrough ricocheted around Wall Street.
It wouldn’t be right to finish off without mentioning one other fledgling basket of stocks to consider watching.
If you want a sense of what the millennial generation is trading, check out some of the “infant IPOs” that recently launched. Initial public offerings like Uber (UBER), Beyond Meat (BYND) and Lyft (LYFT) all seem to be getting a lot of love from young people, according to the Investor Movement Index® ( IMXSM ). The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.
“Millennials kept buying Uber (UBER), apparently because they took to heart what their parents taught them about ‘buying what you know,’ “ Kinahan said, looking at the most recent IMX.
A final flashy acronym doesn’t refer to any particular stock.
“One of the great acronyms is TINA: ‘There Is No Alternative,’ ” O’Hare said. “It refers to the idea that with interest rates so low around the world, your best return prospects are in stocks, not bonds.”
Whether or not that’s actually the case, it’s another one to remember so you can feel smart the next time someone says it on TV.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.>
Historical data should not be used alone when making investment decisions. Please consult other sources of information and consider your individual financial position and goals before making an independent investment decision>
The IMX is not a tradable index. The IMX should not be used as an indicator or predictor of future client trading volume or financial performance for TD Ameritrade>
International investments involve special risks, including currency fluctuations and political and economic instability.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.