As Luis reported in yesterday’s Digest, on Thursday morning Apple announced it was cutting its quarterly revenue forecast. CEO Tim Cook cited lower demand for the iPhone. The news rattled investors, sending shares down nearly 10%.
In today’s Digest, let’s look at this from another perspective.
You see, Apple’s sell-off creates ripples throughout the entire investment world. It’s not an isolated event that affects only Apple shareholders. Instead, it’s more of a lead domino…which, after falling, topples a succession of other dominos.
In this Digest, let’s look at this cause-and-effect relationship. But then, rather than be overly concerned, let’s highlight how to respond, as well as a safe place for your “can’t-lose” assets as the markets look to stabilize.
***This past summer, Apple made history
It did so by becoming the first company with a market cap to pass $1 trillion. Because of its massive size and popularity, Apple trades on several indexes.
To make sure we’re all on the same page, an index is simply a collection of stocks that are chosen to mirror a specific part of the market. Some popular indices like the Dow Jones, S&P 500, and Nasdaq are “weighted.” You might think of this as meaning “the bigger the stock, the more ‘share’ of the index it represents.”
Apple is a part of the Dow Jones, Nasdaq, and S&P indices. And given that it’s such a huge stock, it gets a huge weighting in each index. It’s currently the third heaviest weighted stock in the Nasdaq…
The second heaviest in the S&P…
And seventh in the Dow…
Given this weighting, what do you think happens to the values of these indices (and the investments that track them) when Apple’s stock makes a big move?
Below is a chart from Dec. 31, 2018, through yesterday early afternoon. It shows the percentage change in Apple’s stock (in blue) compared to that of the three indices. Notice how Apple’s market price seem to either push up or drag down the levels of the indices…
That means even if you don’t own any Apple stock, your investments can still be hurt if Apple has a bad day…like yesterday.
***To make this a bit easier to see, look at Apple’s relationship to the Nasdaq
Let’s say you don’t like Apple as an investment. But you do like the thought of investing in, say, many of the tech stocks that trade on the Nasdaq exchange – for instance, Microsoft, Amazon, and Cisco.
Well, the easiest way to invest in those tech stocks would be through the Invesco QQQ Trust ETF. That’s a 1-click way to own the 100 stocks that make up the Nasdaq 100 index. QQQ also happens to be the 7th largest ETF in the world…so lots of investors own it.
Unfortunately, when we look beneath the hood of QQQ, we see lots of Apple – 9.02% of it to be exact.
Do you think a 10% drop in Apple’s market price – when it makes up 9% of QQQ – is going to affect the value of your QQQ investment?
You bet. Yesterday, QQQ dropped 3.3%. So, even though you weren’t directly invested in Apple, you felt it.
***The contagion doesn’t stop there
Moving past the indices and the ETFs that track them, next up to be affected are Apple’s individual suppliers (sometimes called the Apple “complex”). For instance, look at Lumentum Holdings. It makes facial recognition components for iPhones. On Apple’s news yesterday, it dropped 8.4%. Another big Apple-supplier is Skyworks. It shed 10.7%.
The next domino is Apple’s competition. For example, investors in Samsung read the Apple news yesterday and worried about a similar slowdown in their phone sales. That sent its shares down 3%.
Of course, Samsung is part of an index itself – it’s one of the largest components of the South Korean Kospi Index. So, when Samsung drops 3%, how does that affect the Kospi? It fell almost 1%, marking a two-year low.
Let’s pull back and look at the big picture…
Some U.S. broad index investors… and some U.S. tech-sector ETF investors… and some investors in the Apple complex… and some South Korean investors with money exposed to the Kospi… and frankly, many other similar investors around the globe – all of whom may not care a thing about Apple – all saw their wealth decline as a byproduct of Tim Cook’s announcement. Collateral damage. That’s the increasingly connected nature of our world.
Now, there are many more dominos we could discuss, but let’s stop our descent down the rabbit hole and refocus…
What’s the right response to all this?
***Mind the macro, the micro, and yourself
“Mind the macro” simply means take this sell-off in context. As Luis pointed out yesterday with the help of analysts Neil George, Dan Weiner, and Jeff DeMaso, there are reasons for market optimism when we look at the big picture. It’s important to keep them in mind while the financial media is focusing on specific, negative news.
“Mind the micro” means to handle your portfolio wisely. Despite the macro conditions, pay attention to your specific investments. Do you own Apple? Do you own any of the Apple complex stocks or affected ETFs? If so, is your initial reason for owning those investments still intact or has it changed? If it has changed, is it time to sell? As importantly, did yesterday cause you to hit a stop-loss? If so, do the right thing and sell. That’s how smart investors prevent smaller, manageable losses from becoming massive, portfolio-busting losses.
Finally, “mind yourself” simply means to be aware of your emotions, and how that may be affecting your investments. If you feel more comfortable sitting on the sidelines for a bit, pay attention to that.
***On that note, if you’re looking for a temporary safe haven investment that offers good income while the markets settle, our resident income expect, Neil George has a suggestion
In his January issue of Profitable Investing, Neil writes:
…rather than just parking cash, there must be another alternative that offers more yield while also providing liquidity and top-tier safety. I have that refuge for you. Allow me to introduce my good friend Mr. Two-Year…
Neil is referring to the 2-Year U.S. Treasury bond. Back to Neil…
Right now (as of 12/26/18), the two-year Treasury is yielding 2.69%… the yield offered now is good, as I discussed, and I see limited risk for higher yields for this area of the curve. Second, if and when you sell the two-year Treasury, the price risk is very limited. It has what is referred to as low duration risk.
Duration is a measurement of price to yield movements… And as you hold the two-year, as noted above, it will see its maturity shorten day by day with the duration falling further until it is zero at maturity. This means you’ll experience very little to no price risk for this investment. That’s why it’s a great low-risk parking place with yield for some of the can’t-lose assets in your portfolio.
For more of Neil’s safe income investment ideas, click here.
More than any other time in history, we live in an interconnected world. That means sell-offs like Apple’s echo throughout the entire investment arena. But as Luis pointed out yesterday, there are reasons for optimism…and in the meantime, there are safe places to put your money today.
Have a good evening,
Jeff Remsburg
