Apple's Lowered Guidance Underscores Worries About Trade, Global Growth

Apple’s AAPL stunning announcement late yesterday that it would cut its revenue outlook seems to be a continuation of several of the themes that helped take stocks to their worst annual performance in a decade last year.

Arguably the loudest headlines from last year concerned the ongoing trade war between the U.S. and China, and Apple shone the spotlight on that headwind yet again in a letter to investors. In the letter, AAPL said its revenue for the holiday quarter ended Dec. 29 would be significantly lower than expected amid lower iPhone sales in China as the trade war continues. (See more below.)

The announcement sent AAPL’s shares plunging in after hours trading, and they were more than 8% lower this morning, helping to drag down the wider market. It’s a reminder of some of last year’s trading as investors revalued tech shares that had been the high-flying darlings of the market. 

While the news that reflects a weakening economic atmosphere in China also isn’t good for chipmakers, there is one potential silver lining to the Apple announcement. It could provide more incentive for Washington and Beijing to hammer out a deal sooner rather than later. After all Apple is a big, widely held company that is also quite visible to people who may not be invested in the stock market, perhaps adding some popular pressure for the world’s two largest economies to work things out. 

AAPL’s news was reminiscent of Facebook’s FB massive disappointment of investors over the summer, which ended up forming a part of the decline in the FAANG stocks. One question for 2019 could be whether the FAANG stocks can mount a comeback. Aside from Apple’s announcement, news from the group Wednesday was mixed. FB got a bump after a bullish report from Citron Research last week. But Netflix Inc. NFLX fell after SunTrust Robinson Humphrey lowered its price target for the entertainment streaming company. 

In economic news, the private sector added more jobs last month than it has in nearly two years, according to this morning’s Automatic Data Processing report. And in corporate news, a deal between Bristol-Myers Squibb Co. BMY and Celgene Corporation CELG in which BMY would acquire CELG for $74 billion in a cash-and-stock deal sent BMY down as much as 15% in early trade as CELG rose more than 32% at one point.

Energy Helps Stocks End Wednesday Slightly Higher

Stocks managed to erase substantial losses to end slightly higher on Wednesday as volatility continued into 2019. 

The early losses in the first trading session of the new year came after an index for China’s manufacturing sector, the Caixin/Markit Manufacturing PMI, fell below 50 for the first time in 19 months, to 49.7. A reading below 50 indicates economic contraction. For many analysts closely watching how the ongoing tariff tensions with the U.S. will shake out, the contraction indicates that the trade relations may be taking a toll on demand in the second-largest economy in the world. European markets fell as well, after manufacturing data across the eurozone indicated a broad-based slowdown in the region.

On the trade front, U.S. Trade Representative Robert Lighthizerhas said he wants to prevent President Trump from accepting “empty promises” from China and has warned Trump that America may need to use additional tariffs to win true concessions, The New York Times reported. Lighthizer’s comments would seem to form a more hawkish counterpoint to recent Trump comments about progress on a potential trade deal.

The two economic powerhouses are in the midst of a 90-day cease fire with an early-March deadline to reach a deal before new tariffs could be imposed and ratchet tensions up even further. The potential fallout of a protracted trade war has raised concerns about global economic growth among some market watchers, with the latest Chinese manufacturing data and revenue guidance from AAPL seemingly underscoring the unease.

Another casualty of worries about global growth has been the oil market. But on Wednesday, crude futures rallied, helped by news about declining Saudi Arabian exports in December. OPEC’s agreement with other nations to cut production by more than 1 million barrels per day officially started this month.

The rally in crude futures helped boost energy companies, with the S&P 500 energy sector gaining more than 2% for the title of the day’s biggest sector gainer. Oil prices were on track for more gains early Thursday. Still, this is on news from the supply side. Concerns about demand amid a potential global economic slowdown likely could continue to keep a cap on any gains in oil prices.

Real Estate, Utilities Struggle

On the other end of the spectrum, both real estate and utilities fell about 2%. These sectors are often considered safe-haven bond proxies because of their relatively stable cash flow, history of dividend payments, and non-discretionary defensive nature. But in recent days investors have been buying longer-term bonds as a perceived safe haven amid worries about riskier assets, giving real estate and utilities competition. (No investment is completely risk free.)

Not only have bond buyers been out in force, pressuring yields, but the spread between the 2-year Treasury and the 10-year Treasury has been narrowing again. (See more below.)

With some market watchers worrying about the possibility of a recession even as stocks have been tanking, one bright spot is that inflation in the United States still doesn’t seem to be taking hold. That at least holds up one of the legs of the Goldilocks scenario we saw for much of last year as the economy chugged along and inflation didn’t seem problematic.

It’s another leg, the economy, that has had some market participants worried. They seem to have been concerned that the Fed might act too aggressively to head off inflation that many don’t see as problematic and end up choking off otherwise healthy economic growth and its related support of the stock market. To be sure, recent Fed commentary has been getting more dovish.

As this story continues from 2018 into the new year, it may be worth revisiting the definition of a recession. Generally, an economy is considered to be in a recession after gross domestic product falls in two consecutive quarters.

Figure 1: After easing from a recent high for several days, Wall Street’s fear gauge, the Cboe Volatility Index, is rising again after Apple shocked the market by lowering its revenue guidance.The reading of 25, however, puts the VIX right in the middle of its range over the last month. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Apple and China: The trade war between the United States and China seems to have taken a bite out of Apple, with yesterday’s lowered guidance from the tech behemoth serving to underscore mounting worries about a global slowdown. AAPL and other tech companies are heavily tied to the world’s second largest economy, both for sales of their end-products and for the supply chains that help make those products. “We believe the economic environment in China has been further impacted by rising trade tensions with the United States,” AAPL CEO Tim Cook said in his Wednesday afternoon letter to investors. “As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed.”

Flattening Yield Curve: The flattening of the yield curve between the 2-year Treasury and the 10-year Treasury has some market watchers worried about an inversion, which forms when bonds with shorter maturities yield more than bonds with longer maturities. An inversion hasn’t happened with this part of the yield curve yet, but as of Thursday, the 10-2 year Treasury yield spread was at just 0.16% compared with the long term average of 0.95%. An inversion can signal an economic recession andcan be a warning sign for stock investors because it signals possible slowing corporate profits and a potential fall in stock prices. While it’s not for certain that the spread between 2s and 10s will invert it could be worth watching as the story continues into 2019. 

Healthcare Flies High: Amid the stock market’s worst year in a decade last year, there were only two S&P 500 (SPX) sectors that ended in the green. Utilities finished just marginally higher while healthcare was up nearly 4.7%. It’s possible that merger and acquisition activity in the healthcare space helped boost sentiment and thus share buying. But there are unknowns for the sector going into 2019. One is whether a government push might help lower drug prices, even as Reuters reported that nearly 30 drug companies have taken steps to end their self-imposed halt to price hikes. Meanwhile, it also remains to be seen what will come of a Texas judge’s ruling that Obamacare is unconstitutional.