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Last week, the Department of Justice and the Federal Trade Commission announced their intention to investigate Amazon, Facebook, Google, and Apple for “anti-competitive behavior”. In our view, this move is likely at the behest of President Trump in response to a number of Democratic candidates for President, who have become increasingly populist (strict) on “big tech”. We expect this regulatory and political scrutiny coming from multiple angles to intensify as the election season progresses, which presents significant downside risk for FAANG (Facebook, Amazon, Apple, Netflix, and Google) equities. It will be a populist political arms race and FAANG equities will be sold as public enemy number one.
The Passive Asset Management Overdose
*For every $100B entering passive index funds $16B (SPY) to $48B (QQQ) MUST go into FAANG stocks. The QQQ ETF is 48% Apple, Amazon, Microsoft, Facebook, Google and Netflix – Look Out.
The market concentration in these large-capitalization tech stocks, especially through ETFs, means that when the FAANGs sneeze, the whole market could catch a serious cold.
Combined Wealth of the Top 20 Richest People in the US
2019: $1.05 trillion
2009: $438 billion
1999: $570 billion
1989: $138 billion
Tech billionaires Jeff Bezos (Amazon), Mark Zuckerberg (Facebook), Larry Page (Google), and Sergey Brin (Google) make up a quarter of this $1.05 trillion in wealth. Bezos alone comprises 10%, even after his $36 billion divorce haircut. In addition, US Financial accounts are now worth 5.3x GDP, significantly more than the 4.7x ratio in 2009 or 4.5x in 2000. Meanwhile, retail store closings are at an all-time high, compliments of e-commerce, and Silicon Valley is drooling over the prospect of autonomous vehicles, which threaten the jobs of the nearly 5 million Americans employed as drivers of some sort.
“Big Tech” Is a Populist Lightning Rod
This has made the FAANGs (Facebook, Amazon, Apple, Netflix, and Google) a lightning rod for populists and they are now under attack from all sides of the political spectrum. Nearly every major Democratic 2020 presidential candidate has promised to investigate potential anti-trust violations by “big tech”. Some like Elizabeth Warren and Bernie Sanders have made plans to limit mega-mergers, what they see as vertical integration, and potentially break some companies like Facebook up central to their campaigns.
Divergence in Consumer Staples vs. FAANGsOver the last few weeks, we’ve seen a divergence between Consumer Staples (XLP) equities and the FAANGs (FANG). This indicates that money is pouring into defensive stocks as investors sense trouble brewing.
Trump and Democrats in Tug of War on Key Voters
We see the recent announcements out of the DOJ and FTC last week as a response from the Trump administration to populist pressure from the left. The President can direct the general focus of these agencies, and the bureaucrats within them are sensitive to the political considerations of the White House. As the 2020 election kicks into gear, we expect Trump to continue to attempt to outflank his Democratic rivals on the big tech issue — this is just the first inning so get your popcorn now.
In 2016, Trump was able to win over a populist strain of swing voters dissatisfied with their economic circumstances who Republicans hadn’t been able to sway into their camp since Reagan. Many of these voters lost their jobs or had to take a pay cut as a direct consequence of the rise of e-commerce. We’re now seeing a tug of war between Trump and the Democrats over these voters and the proxy issue is big-tech.
Democrats and Trump Will “One-up” Each Other throughout Election
Democrats are talking tough while Trump is trying to wrench the spotlight back onto himself with antitrust news coming out of the government. We expect this dynamic to intensify as we move into the Democratic debates, or if Sanders or Warren surge in the polls.
Democratic Debates in 2019 Announced So Far:
AMZN, GOOG, and FB Fell on Anti-Trust Announcement Last WeekFAANG stocks had their ninth-worst intraday loss ever on the back of last Monday’s antitrust news (when aggregating their market capitalizations). Facebook was down 7% on the day, while Amazon and Google were down 4.5 and 6%, respectively. Google also broke a four-year trend channel to the downside – look out below. As the political tug of war escalates, we will likely see more announcements from regulators and more shocks to the FAANGs
FAANGs Dominate ETFs — Markets Beware!
As we noted last July in our blog The Dark Side of FAANGs, the move into passive asset management (mostly in the form of ETFs) over the last ten years has opened the door to a cascading effect emanating from big tech and its downside risks. In 2009, FAANG stocks were a top 15 holding in just 14 ETFs. Today, that number is over 630.
FAANGs as a percentage of total S&P 500 Market Capitalization