Apple (NASDAQ: AAPL) shares plummeted almost 10 percent yesterday after the market close when the company cut its quarterly sales forecast for the first time since 2004.
In mid-2018 the stock was trading at $227 per share and is now trading in the mid $140s.
On the chart below you can see how Apple had outperformed the market for most of the year until just recently experiencing a huge dip to drop below overall S&P performance.
The cut has only exacerbated concerns about lowering demand for Apple’s marquee product, the iPhone, which accounts for the clear majority of the company’s sales. The slash in sales estimates also raises questions about Apple’s prospects in China, the world’s largest smartphone market, and is causing broader market concerns about slowing growth in China.
Neil George, editor of Profitable Investing, has been studying and writing about Apple intensely for the last few months and none of this caught him off guard.
Apple’s sudden announcement shouldn’t be that surprising. Its unit sales have been slowing which in turn means that its ability to sell more services and content is slowing. Months ago, suppliers for components reported declining sales, and assemblers reported that Apple instructed them to shut down production lines. China is only the third largest market [for the iPhone] and the unit sales problem is worldwide.
Apple has been countering that it’s not as much about the iPhones as services. But again, as I’ve written in my Dividend Digest and in Profitable Investing, you can’t sell more services if you’re universe of iPhones isn’t growing. So, the company figured out that analysts were coming to similar conclusions, so it announced no more unit sales information will be released by the company. Apple expected this would divert attention from the unit sales slowdown.
China is an increasingly difficult market for Apple. The Wall Street Journal reported today on the loss of market share to home-grown rivals, noting that iPhones are more expensive, and the majority of Chinese users spend time in one app, WeChat, a chat, payments and social media app from Tencent Holdings Ltd. This makes the Chinese consumer less likely to have Apple brand loyalty.
All that said, there are still a lot of believers in Apple’s products and management. It’s the largest holding for Berkshire Hathaway, after all.
And, to be clear, Neil has not advised his subscribers to sell Apple shares but moved them to a “Hold” position. So, Neil, what does Apple have to do to get its stock price back up?
I’ve argued that the company should do what Google, Blackberry and others have done by licensing the iOS operating system to other manufacturers. And then either continue to contract with suppliers to engineer and build its iPhones while others make competing iOS handsets and iPad alternatives. And in turn, focus on the services on iTunes.
We’ll see what happens. But clearly Apple has lost some of its shine. Apple products have a reputation for dogged customer loyalty and that remains an asset, but the company may have found the edge of the earth.
Any Optimism During Market Volatility?
So far, the market in 2019 is the same story on a different calendar.
That only makes sense given that investors have not seen any relief from their big worries: US-China trade relations, concerns about slowing global growth and Federal Reserve monetary policy.
But things are not as gloomy as some might have you believe, and I’m going to describe why.
Yesterday, the S&P 500 rose by 0.12%, or 3.18 points, reversing losses from earlier in the session. The Dow moved up 0.08%, or 18.78 points, after recovering from an early morning drop of almost 400 points at the intraday lows. The Nasdaq advanced 0.46%, or 30.66 points.
As of this writing on Thursday afternoon, the S&P was down more than 1.80%, the Dow and Nasdaq are down more than 2.25%.
Before the Christmas holiday I advised readers that volumes are quite light this time of year, so big market swings are not unusual, and shouldn’t be given greater weight than they really represent.
I’d like to tell you the crazy market gyrations are done, but that’s just not the case.
Many individual investors are feeling the squeeze, and predictions for a bear market have become prevalent.
The fear in the market is real.
But – and I feel like I bang this hammer again and again – the fundamentals of the US economy are incredibly strong.
The data backs this up, and it’s not wishful thinking.
Dan Weiner and Jeff DeMaso are the editors of the Independent Adviser for Vanguard Investors and long-time market watchers. In a recent note to their subscribers, Jeff emphasized that the economic fundamentals are too good to ignore, even if 2019 growth doesn’t match what we saw in 2018.
My optimism isn’t grounded in a blind faith in the future, nor do I think I have my head in the sand here. I start by looking at the two factors—earnings and interest rates— that drive market returns over time. Corporate earnings grew more than 25% in 2018. That’s great, but it’s also not sustainable. As the sugar high of the 2017 tax cuts wears off, earnings won’t grow as fast. That doesn’t mean that earnings must shrink—just that they won’t increase by as much.
The same message applies to the economy. The U.S. economy grew at a robust pace last year, around 5%. It is unlikely we’ll match that growth in the upcoming year. But it doesn’t mean we’re slipping straight into a recession.
Regardless of fundamentals, investor sentiment has turned negative. Neil George noted that this could be powering a lot of the selloff. In this latest Profitable Investing Journal, Neil noted that in a recent weekly survey, the American Association of Individual Investors (AAII) found those with a bullish outlook fell to 21% from 38%, while those with a bearish outlook soared to 49% from 31%.
But Neil joins others in noting that the overall economic picture for the United States is still very positive.
Consumer spending for the holidays was up over last year by 5.1%, as reported by Mastercard (MA). And business investment and spending data remains in positive territory—just as it has through 2018.
In the U.S. Census Department’s most recent report on advance monthly sales estimates for retail and food services, November saw sales gain 4.2% [compared to the previous November]. And while sales gains are off from recent highs seen in July at 6.6%, they are still robust.
Forward-looking surveys confirm that consumers are still confident about their spending, even during the past month’s market woes. The Bloomberg Consumer Comfort (Comfy) Index is sitting at 59.4, which is significantly higher than where it was last December, and not all that far off recent highs from September.
Estimates for earnings, although down from last quarter’s highs, are still estimated to be quite positive. Neil again….
Bloomberg compiles estimates for earnings from corporation guidance and analyst projections. For this quarter, the consensus is for earnings growth for the S&P 500 companies to expand by 14.10%.
So, consumer spending, business investing, earnings growth, low interest rates and low inflation are all here.
We’ll get a better indicator of what the early part of 2019 holds the week of the 14th as earnings season kicks off. Many of the big banks report quarterly earnings that week.
But you should expect the market to continue to experience wild swings for the time being.
To a richer life…
Luis Hernandez, Managing Editor
and the research team at InvestorPlace.com