Social Media and FANG Stocks Will Trigger the Next Financial Crisis
It’s no surprise that Facebook, Inc. (NASDAQ:FB) recently experienced its biggest one-day stock price drop ever. It was a veritable earthquake, and its aftershocks have already reached Twitter Inc (NYSE:TWTR) and other social media companies. Perhaps it’s time to expect another financial crisis.
After all, Facebook, the symbol of the stock market’s irrational exuberance of the last few years, lost almost a fifth of its value in a single session. The few realists on Wall Street always knew that Facebook stock should never have reached its shockingly high valuation in the first place.
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On July 26, Facebook experienced the worst collapse in Wall Street (if not world) history, and the causes should trigger many an investor’s warning bells.
Facebook, Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX), and Google, aka Alphabet Inc (NASDAQ:GOOG)—the so-called FANG stocks—are not safe anymore.
Regardless, there is a way to survive the next gloomy economic period.
What Caused Facebook’s Humiliating Drop, and Why It Could Trigger a Financial Crisis
Here’s why Facebook’s drop is so ominous.
Facebook stock burned through some $120.0 billion in a single trading session. The stock price went from $217.00 to $176.00. That’s a drop of almost 19%.
Such was the damage that other big information technology, social media, and Internet giants posted major stock price drops as well. It looked like a miniature financial crisis on Wall Street. Certainly, it’s an episode that, in the context of Wall Street history, will live in infamy.
Nevertheless, while Facebook’s fall beats what Intel Corporation (NASDAQ:INTC) or Microsoft Corporation (NASDAQ:MSFT) suffered in 2000 when the tech bubble erupted, it’s what’s behind the story that’s most interesting.
Facebook actually reported that it increased sales and earnings during the second quarter of 2018. The social media platform also increased the number of its average monthly users by over 10% on an annual basis.
Investors Have Signaled Their Anxiety
Investors are no longer satisfied by past performance. The Dow Jones Industrial Average set too high a record in January 2018, and it has not managed to produce a repeat performance.
The great wall of social media has finally started to show cracks. Investors worry that Facebook’s falling number of users in Europe (for the first time in its history) has exposed the social media giant’s limits.
And then there are new European Union (EU) laws that will restrict social media for anyone under the age of 16 to those who get formal parental permission. That means an automatic loss of at least three million users. U.S. Congress—especially if the Republicans keep control of both Houses after the November mid-term vote—could adopt similar restrictions.
That won’t just hurt Facebook; it could kill Snap Inc (NYSE:SNAP) and others.
Investors will consider Facebook stock’s recent downturn as a sign of a reversal of recent social and market trends in the richest (mature) markets.
Meanwhile, given the current trade war pressures, investors will have little hope that emerging markets might offset any revenue losses.
Anxiety Is Spreading
The big money is still in North America, Europe, and Japan—while China remains off limits.
Facebook stock’s recent tumble is merely another example of investor anxiety. Investors don’t just want better performance relative to the previous quarters.
They demand tangible evidence or assurance that performance will continue to improve. What Facebook posted in this regard clearly raises many questions about social media tech stocks. That’s why such stocks could prompt a financial crisis.
And, of course, this also goes for any other prominent stock that has experienced significant gains in the past few years.
Facebook may have triggered more than a bear market because investors have lost the one thing that pushed its valuation so high: confidence. This uncertainty is dangerous because it can easily spread throughout the social media sector and beyond.
Tech Stocks Are Under the Gun
The Silicon Valley giants are under pressure. The United States has imposed new tariffs against its trading partners, many of which are key military and political allies.
Trade tensions cannot do anything but worsen as Europe prepares to retaliate. Those wondering how need not look any further than their own computers.
Trump may impose tariffs on cars and other European goods that Americans love. Many companies have been making big profits in Europe and the rest of the world without paying their fair share of taxes.
Accountants at these firms have probably started sharpening their pencils to prepare for the onslaught of regulations and tighter profit margins that may be coming soon.
The EU has already slapped Google with a $4.0-billion fine over monopolistic practices. China and others could follow, causing Silicon Valley and Wall Street to panic.
Given tech stocks’ previous gravity-defying gains, a tech-fueled panic could easily convert into a financial crisis.
