During the five-year period from 1967 to 1972, investors piled into the top growth stocks of the day, including IBM, GE, Xerox, Polaroid, Kodak, which became known as the "Nifty Fifty."
They had solid earnings growth and high price-earnings ratios, and were often called "one-decision stocks" because investors were unlikely to ever need to sell them.
The long bear market from 1972 to 1982 destroyed that theory and most of the Nifty Fifty underperformed the broader stock market during the 1980s. Institutional investors, including bank trust departments, suffered poor performance. Pension funds suffered significant losses that took years from which to recover.
Now the market seems to be focused heavily on what could be called the "Nifty Quartet" or "Fab Four" – Amazon, Alphabet (Google), Apple and Facebook. As The Wall Street Journal pointed out, the four account for almost one-fifth of the Standard & Poor's 500 Growth index. Three of the stocks, Amazon, Alphabet and Facebook have high price-earnings ratios, with Amazon's being a stratospheric 190.2, and Apple the low at 17.55. Three had high year-over-year earnings-per-share growth through March 31, with Facebook being the high at 76.3% and Apple, year-over-year through April 1, the low at 4.9%.
Institutional investors ought to at least consider that history could repeat itself, especially if there is another economic slowdown when the Trump euphoria wears off and triggers a bear market. They should be looking at the portfolios of their managers to see if they are overweight, market weight or underweight the Fab Four.
They also should ask about other overweight tech stock positions. They should ask what would be the impact on their portfolios if there is a correction, especially one that lasts as long as the 1972-'82 one.
John Maynard Keynes once said that history repeats, but not exactly. Since it is unlikely recessions and market corrections have been abolished, the Fab Four will no doubt be tested in the future, and likely few will see it coming.
