On Oct. 10 and 11, the U.S. stock market plummeted 3.3% and 2%, respectively, as measured by the MSCI USA Investable Markets Index (IMI). Fears of a slowdown in global economic growth, potentially stemming from global trade disputes and rising interest rates, were among the reasons cited for this steep drop.1
As FAANG stocks — those issued by Facebook, Apple, Amazon, Netflix and Google — have dominated U.S. market performance for the past few years, we examined how they performed during the recent market turmoil. A factor-based analysis finds an equal-weighted simulated portfolio of these stocks performed very differently on the two days under examination.
We used the MSCI USA Total Market Model to better understand the movements of these five stocks during this period of market volatility. On Oct. 10, the simulated portfolio performed worse than the overall market, plunging 5.6% compared to the market’s 3.3% decline. The following exhibit provides greater insight: Out of the portfolio’s total return of -5.6%, the market and beta factors contributed -4.3%, while other style factors contributed -1% (with momentum accounting for about one-quarter of that figure), industries contributed -0.6%, and specific return (the part of the stock return unexplained by factors) was 0.3%. For the individual stocks, the factors accounted for the bulk of the returns, and the stock-specific returns accounted for a relatively small fraction. This means that most of the price movement in these stocks was caused by market-wide effects, not by the pressure on the individual names.
Oct. 10: Factors contributed nearly all of the simulated returns
| Return | Market | Beta | Momentum | Other Styles | Industries | All Factors | Specific | |
|---|---|---|---|---|---|---|---|---|
| -4.63% | -3.28% | -1.27% | 0.01% | -0.39% | -0.67% | -5.59% | 0.95% | |
| Netflix | -8.38% | -3.28% | -1.55% | -0.61% | -0.96% | -0.70% | -7.09% | -1.30% |
| Apple | -4.63% | -3.28% | -0.40% | -0.41% | -0.59% | -0.05% | -4.73% | 0.09% |
| Amazon | -6.15% | -3.28% | -0.91% | -0.68% | -0.81% | -0.87% | -6.55% | 0.39% |
| -4.13% | -3.28% | -0.99% | 0.38% | -0.75% | -0.67% | -5.31% | 1.18% | |
|
Simulated portfolio |
-5.59% | -3.28% | -1.02% | -0.26% | -0.70% | -0.59% | -5.86% | 0.26% |
While factors dominated performance for the five-stock equal-weighted portfolio on Oct. 10, we found a markedly different result for the following day. While the U.S. stock market continued falling on Oct. 11, dropping another 2%, FAANG stocks lost only 0.65%. Three out of five stocks generated positive specific returns above 1%. Overall, the portion of the return unexplained by factors was 0.7%.
Oct. 11: Specific return played a bigger — and positive — role
| Return | Market | Beta | Momentum | Other Styles | Industries | All Factors | Specific | |
|---|---|---|---|---|---|---|---|---|
| -0.13% | -2.07% | -0.29% | -0.01% | 0.47% | 0.68% | -1.21% | 1.07% | |
| Netflix | -1.47% | -2.07% | -0.39% | 0.12% | 0.69% | 0.29% | -1.35% | -0.12% |
| Apple | -0.88% | -2.07% | -0.10% | 0.07% | -0.18% | 0.16% | -2.13% | 1.24% |
| Amazon | -2.04% | -2.07% | -0.23% | 0.12% | 0.36% | 0.81% | -1.01% | -1.05% |
| 1.30% | -2.07% | -0.23% | -0.08% | 0.63% | 0.68% | -1.05% | 2.35% | |
|
Simulated portfolio |
-0.65% | -2.07% | -0.25% | 0.04% | 0.40% | 0.53% | -1.35% | 0.70% |
Over both days of stock market declines, specific return for these stocks was positive, totaling almost 1%. This positive performance counters the notion of this market downturn being led by FAANG stocks and shows market support of these popular names even in the darker days.
In the periods of high market volatility, factors often are responsible for the most of stock returns. Understanding how factors contribute to performance of both diversified portfolios and individual stocks may help investors uncover insights into market events as they develop.
1 For example, see Driebush, C. “Quickening retreat from tech sinks market.” Wall Street Journal, Oct. 10, 2018.
Further reading:
How can active managers add factors to the portfolio?