What happened
Uncertainty regarding the length and duration of the downturn have hung over the market like an anvil this year, with many investors afraid to buy the dip for fear of suffering further declines. Add to that the Federal Reserve Bank's relentless campaign of rising interest rates to combat persistent inflation, and it's no wonder that consumers and investors alike have shifted their behavior based on the tough macroeconomic conditions. However, the Fed changed its tone today, suggesting the pace of future interest rate hikes will moderate, perhaps as soon as next month.
With that as a backdrop, popular FAANG stocks were squarely in rally mode Wednesday afternoon. Netflix (NFLX 4.13%) surged 9.2%, Alphabet (GOOGL 1.27%) (GOOG 1.25%) jumped 5.4%, honorary member Microsoft (MSFT 1.52%) climbed 5.8%, while Apple (AAPL 0.59%) and Amazon (AMZN 1.29%) each rallied 4.5% by the time the market closed on Wednesday.
There was no company-specific news that even came close to explaining the magnitude of these broad-based gains. This suggests that investors were reacting to the potential for slowing interest rate hikes and an overall improvement in the beleaguered economy.
Image source: Getty Images.
So what
Federal Reserve chair Jerome Powell delivered a highly anticipated speech at the Brookings Institution in Washington, D.C. on Wednesday. Market participants were on the edge of their seats, hoping to glean insight into how the central bank plans to continue its ongoing battle with inflation. Wall Street heard exactly what it was hoping to hear, as Powell's comments suggested that the Fed would begin to slow the pace and tenor of interest rate hikes, beginning as early as December.
"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down," Powell said in his speech. "The time for moderating the pace of rate increases may come as soon as the December meeting."
While Powell's missive didn't provide specific details, the remarks seemed to suggest that December's expected interest rate hike could be lower than the 0.75% rate hikes that the Fed has levied in each of the past four outings. The increase in early November brought the federal funds rate to a range of 3.75% to 4%, its highest rate since early 2008 and the sixth increase so far this year.
The combination of near 40-year-high inflation and the unrelenting cadence of rising interest rates has threatened to push an already fragile economy into recession. This prospect has weighed on the major market indexes, with the S&P 500 and Nasdaq Composite down 16% and 30%, respectively, from highs reached late last year.
Powell's comments were a breath of fresh air, suggesting the worst may be behind us.
Now what
When we talk about FAANG (or FAANG-M) stocks, we are talking about some of the most popular stocks among investors:
- Facebook parent Meta Platforms
- Apple
- Amazon
- Netflix
- Google, which rebranded as Alphabet
- Microsoft
The FAANG stocks have been among the best market performers over the past decade, but their performance has been mixed during the downturn. Demand for Apple's iPhones has held up remarkably thus far, but the holidays will soon test consumer resolve. Netflix was savaged by its first subscriber decline in more than a decade. A return to growth helped the stock rebound, but it's still nearly 50% off its 2021 highs. Declines in both e-commerce and advertising spending have beaten down Amazon and Alphabet, respectively, with investors waiting in the wings to see if or when growth returns. Microsoft serves both business and consumer markets, and each of its major segments has taken a hit.
Powell's comments gave investors the excuse they needed to view the glass as half full today as they bought up FAANG-M stocks, which are down between 19% and 49% so far this year.
Furthermore, previously lofty valuations have become much more reasonable over the past year, though still not cheap in terms of traditional valuation metrics. For example, Microsoft still trades for nearly 8 times next year's sales, while Apple has a forward price-to-sales ratio of 5. Alphabet and Netflix are both trading for 4 times next year's sales, while Amazon -- the most reasonably priced of the group -- trades at less than 2 times forward sales, putting it squarely in bargain basement territory. I would argue that, in better economic times, investors awarded these stocks with premium valuations due to their consistent growth.
Given their history of outperforming the broader markets -- and doing so by a wide measure -- now looks like the time to add to these market leaders or buy an initial position, before they start to soar.
