Markets Rise Despite Google Antitrust Suit

DOJ accuses Google of anticompetitive behavior

U.S. equity markets rallied out of the gate this morning as renewed hopes of a new stimulus deal emboldened investors to return to buying stocks. That rally lost some steam into the close as House Democrats downplayed the timeline they had set for the White House to agree to a deal by this evening. In keeping with its recent trend, the S&P 500 has been stuck below 3,550 for weeks. Still, a strong rally across most sectors helped ease some of Monday's losses.

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The U.S. Department of Justice (DOJ) dropped an antitrust lawsuit on Google, claiming it has a monopoly on search advertising and forces its Google app onto mobile phones (much more below). It's the first of many antitrust complaints the DOJ and the Federal Trade Commission are working on against Google, Amazon, Facebook, and Apple.

Technology stocks

While antitrust allegations and accusations of monopolistic behaviors are serious matters, investors are clearly not too concerned.

Alphabet organizational chart

DOJ Files Antitrust Suit Against Google

The U.S. Department of Justice has filed an antitrust lawsuit against Google, alleging that the online giant engaged in anticompetitive conduct to preserve monopolies in search and search-advertising. The lawsuit is the first to emerge from the DOJ's investigations of massive tech companies like Alphabet — the parent of Google — Apple, Amazon, and Facebook.

What's this all About?

The DOJ's lawsuit alleges that Google uses a web of interlocking businesses that it owns or controls (see chart above) to lock out competitors from the highly lucrative internet advertising market. With 80% market share in online search, Google's dominance, the lawsuit says, makes it impossible for competitors to have their search results appear in front of consumers.

For those of us not educated in antitrust laws, the DOJ says the search result on Google for Men's Brown Shoes is anticompetitive because the search engine pushes down organic results for marketers or publishers that don't pay it for a higher listing. You've seen it before a million times, but it looks like this.

Google search result for brown shoe

Preferential Treatment on Mobile Phones

The suit also alleges that Google uses lucrative arrangements with mobile phone carriers to preload its search application on its Android operating system. The government alleges that Google unlawfully prohibits competitors’ search applications from being preloaded on phones under revenue-sharing arrangements.

Now What?

Alphabet, which owns Google, has more than $120 billion cash on hand and has the resources to fight a long and protracted legal battle. It has claimed in the past that it offers its services for free and is therefore not a monopoly. The Federal Trade Commission tried to fight a similar battle with Google in 2012, but ultimately settled with the company in 2013 after Google agreed to make slight changes to its practices. If the DOJ prevails, Google may be forced to change the way it operates and possibly break up its businesses. But, the DOJ’s lawsuit reportedly does not specify particular remedies, which would likely be addressed in a later case.

Do Investors Care?

Not by the looks of it. The threat of antitrust action or a break up of Google's business has always hung around the company like an albatross. It's the same for the other trillion dollar giants that dominate nearly every industry they enter. That's why investors like them... they dominate. Breaking them up might even make them more valuable.

Here's what $10,000 invested in each of them ten years ago would've returned for you today.

Alphabet, Amazon, Facebook, Apple stock price chart

Volatility, in Perspective

2020 has been a year for the head-spins, to say the least. As Ben Carlson notes on his blog , at certain points this year the S&P 500 has been up 8% and down 30% from where it finished in 2019. It’s currently up around 8% on the year. The Nasdaq 100 has been up as much as 43%, down as much as 20%, and currently sits at a 35% gain in 2020. The Russell 2000 Small Cap Index has been up as much as 2% in 2020, down as much as 40%, and currently sits at basically breakeven for the year.

JPMorgan Asset Management created a chart that compares the biggest peak-to-trough drawdowns each year on the S&P 500 to the total return for that year.

Annual returns and intra-year declines

2020 Looks Like 1987

2020's drawdown looks a lot like 1987 when there was also a 34% peak-to-trough drawdown for the S&P 500. As you recall, 1987 gave us Black Monday, the anniversary we celebrated yesterday. In 23 out of the 41 years in this chart, there have been double-digit corrections. In 12 of those 23 years, the market actually finished the year in positive territory. In eight of those 23 years, the stock market finished the year with double-digit gains.

Volatility doesn't always bring drawdowns, but it does make your neck sore.

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  1. Google. "The ad tech industry is crowded and competitive."

  2. A Wealth of Common Sense. "Investors Need to Become More Comfortable With Volatility in Their Portfolios."

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