As an old ad slogan goes, “Life comes at you fast.”
Two pieces of market news yesterday show just how quickly things can change.
In December, the Federal Reserve raised the Federal Funds target rate a quarter point, from 2.25% to 2.50%.
That was widely expected, and the market didn’t really respond, but things changed mere minutes later during Fed Chairman Jerome Powell’s press conference.
If you watched the December press conference live and the market at the same time, as I did, you saw the market turn downward as Powell affirmed that we should expect two more rate increases in 2019 and that the Fed would continue with its balance sheet reduction program – allowing $50 billion a month to run off.
The market responded to the committee statement and Chairman Powell’s press conference by dropping more than 300 points.
Yesterday, the exact opposite happened – and it set the market soaring.
The market knew the Fed wasn’t changing interest rates. It was the FOMC statement and Powell’s press conference – specifically about future rates increases and the balance sheet reduction program – that everyone was waiting for.
Specifically, the FOMC statement removed the word “gradual” when discussing rate increases and now emphasizes the word “patience.”
In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
The Dow surged more than 400 points
So, what changed between Dec. 18 and now?
According to Powell, the narrative of slowing global growth continues, including China and Western Europe. In addition, he said the Federal government shutdown will leave some imprint on Q1 GDP, which could be even larger if another shutdown occurs. Finally, financial conditions began to tighten in Q4, and remain tighter than they were.
InvestorPlace analysts think the Fed is finally doing the right thing.
After the last press conference, Matt McCall, editor of Investment Opportunities said Powell was completely “out of touch.” Not this time….
This is the exact statement the chairman should have said last meeting. The reality is that the economy is growing at an “okay” pace, corporate earnings are solid, inflation is in check, and the yield on the 10-year is where it was last year. Why would you need to continue raising interest rates at a rapid pace? There is no need.
If the Fed actually does what is says and becomes data dependent as it should be, then stocks are set to make new highs by the end of the first quarter. With stock valuations at much lower levels than one year ago and the Fed not being aggressive it could lead to a gain of 20%+ by midyear in the S&P 500.
Eric Fry, editor for The Speculator, saw signs of this stance in the December statement. At the time he remarked that although the statement didn’t satisfy the market’s desire for immediate gratification, it was very positive.
He thought the Fed was signaling that the actual number of rate increases in 2019 could be zero.
Here’s what he said in December:
Zero rate increases might come into play, thanks to the new language the FOMC added to today’s release: “The Committee…will continue to monitor global and financial developments and assess their implications for the economic outlook.”
In other words, if stocks keep falling, interest rates won’t keep rising…
Net-net: I’m expecting stocks to regain their buoyancy and to perform well into next year.
Today, Fry notes that the market has rallied more than 7% since the December FOMC meeting and is continuing to rally today.
The FOMC signaled very clearly today that the rate hikes for 2019 that seemed so automatic one month ago are now far from automatic.
Investors should be feeling very bullish after an impressive earnings season and a dovish Fed stance.
Apple posts earnings surprise, but how do you measure success?
Apple CEO Tim Cook has taken a tremendous amount of heat recently.
First, he announced that the company would no longer report quarterly iPhone sales as he thought there was too much emphasis on that number and that it didn’t reflect the direction of the business.
Then, on Jan. 2., Cook announced that the company was lowering its revenue guidance for the quarter based on several factors, including weak sales of its latest iPhone in the Chinese market.
Both times, the market hammered the stock and pundits hammered Cook.
But everything changed quickly on Wednesday.
Apple reported quarterly earnings of $4.18 per share, beating analyst estimates of $4.17 per share. This compares to earnings of $3.89 per share a year ago.
Apple also brought in revenue of $84.3 billion, which was better than the $83.97 billion analyst estimate.
The stock surged almost 7%, surpassing the stock price the day before Cook’s Jan. 2 statement.
As of Thursday morning, the stock is up another 1%.
If you hold Apple stock, you need to adjust your expectations.
It appears that Cook has managed to reset market expectations about iPhone sales and investors are more focused on the services side of the business.
iPhone sales have been the big number every quarter for the last decade – if iPhone sales exceeded expectations, the stock surged. This was the first quarter that Apple did not report iPhone sales, although it did reveal that its base of devices reached an all-time high of 1.4 billion.
The services side of the business represents only 13% percent of the revenue, but that is the direction the company wants to go, and clearly its where Cook wants investors to look.
The company reported that revenue for its services segment for the period was $10.9 billion, which represents a 19% gain compared to Q1 2018.
The change to more focus on services isn’t going to happen overnight, and investors should ask themselves if they believe company management can get them there.
Previously, Cook has said he thinks Apple can make a “significant contribution” in health care, more significant than step-counting on the Apple Watch.
The recent announcement of a partnership between Apple and Aetna insurance to develop an app for health care, personalized for the user, is part of that strategy. The app, called Attain, will reward members who engage in healthy behavior, and provides Aetna members with reminders such as taking medication on time.
Aetna merged with pharmacy CVS in November and could also be a channel to more Apple Watch sales.
If you hold Apple stock, are you a believer in this next phase of the business? Can the services business thrive if hardware sales are at a peak and can’t grow further?
Let us know what you think at email@example.com.
To a richer life…
Luis Hernandez, managing Editor
and the research team at InvestorPlace.com