One of the favorite pastimes of market watchers is predicting the next seismic shift in investor preference. The latest trendy forecast goes something like this: We've had a major pivot from the digital darling FAANG stocks to the rejuvenated "Blue Chips" of 2018. However, finding evidence of this type of leadership swap in history is far from obvious.
The FAANG terminology, while catchy, is too narrow for this particular exercise. The Nasdaq Composite index, in which these five stocks represent 26 percent, and technology or internet names account for roughly 60 percent of the market value, has been the strongest of the major US indices over the past several years.
For the purpose of this exercise, the Dow Jones Industrial average, with its broad diversity across major industry sectors, including such names as Caterpillar, Walmart, Boeing, United Technologies, Pfizer, Disney, and Nike, is a proxy for the Blue Chips.
On a price basis, the Dow advanced an outstanding 9.0 percent in the third quarter of 2018 compared to a very healthy 7.1 percent for the Nasdaq Composite index, for an outperformance of 1.9 percent. If we review the past 10 years of data (see exhibit below), the Dow has beaten the Nasdaq by that amount or more only 25 percent of the time. Furthermore, the two consecutively strongest relative quarters were the third and fourth of 2008, and we know what happened then.
The past five years presents a similar picture, in which the Dow hit only one two-hit streak against theNasdaq, in the first half of 2016. Otherwise, we have witnessed a tech/internet/small cap driven market with the Nasdaq up 113 percent cumulatively over this period versus 74 percent for the Dow.
So what might have changed so much to warrant the super pumped excitement about Blue Chips and belief that this Dow rally has legs?