Generally speaking, I try to avoid spending too much time obsessing over individual stocks unless there’s a compelling case to be made that recent price action in a given company’s shares has a clearly defined role to play in shaping or otherwise affecting the macro and/or geopolitical narrative.
2018 has offered up plenty of opportunities to document the travails of individual companies in the context of the broader market and what’s interesting about Apple’s recent fall from grace is that the story so closely tracks the macro narrative that you could pretty easily argue that the two are to a certain extent synonymous.
When Lumentum slashed its FYQ2 outlook back on November 12 citing a “meaningful reduction” in shipments from a major customer, it presaged slowing demand for some of the world’s most important consumer products. Within a week, at least three other suppliers cut guidance. In the final blow, the Wall Street Journal confirmed Apple has cut production orders for all three of the new iPhone models. Goldman then piled on, warning that the company appears to be losing pricing power.
But this goes well beyond waning demand for iPhones. There’s a read through for global demand more generally and also for the Semi cycle which appears to be turning.
In short, it’s not a stretch to say that Apple may be a harbinger of what’s coming for the global economy and it’s certainly not a coincidence that the company is having such a rough go of it at the exact same time as the incoming economic data is rolling over across the globe.
Meanwhile, Apple is front and center in the tariff debate. On Monday evening, Donald Trump told the Wall Street Journal that he might well slap tariffs on phones and laptops from China, a move that would obviously affect Apple. In September, the administration appeared to bow to pressure from Tim Cook in the course of sparing Apple Watch from the impact of the tariffs, but it sounds like the President’s generosity may be running out.
Apple exemplifies the supply chain debate and is emblematic of why it’s so difficult to rewrite the rules of global trade and commerce overnight. Bernstein’s Tony Sacconaghi told CNBC on Tuesday that if Trump went whole hog, “25% of Apple’s revenue, call it $50 billion, would be subject to a 10 or 25% tariff.”
Sacconaghi went on to warn that China could retaliate, with “big league” consequences:
Could they try to disrupt Apple’s supply chain in some way? Could they not authorize new phones for sale in the country? There are many things that China could do and that could ultimately be even more devastating.
“While we ultimately believe this is all part of a broader negotiation with China as talks heat up over the next week, now Cook and Apple find themselves squarely at the center of the tariff talks which were previously background noise as investors try to gauge what a potential 10% tariff on iPhones and other products would do to demand and unit growth over the next 6 to 12 months if ultimately imposed”, Wedbush chimed in.
And see, this is what I mean when I say that Apple has become synonymous with the macro narrative, a state of affairs that compounds its already outsized sway over the broader market.
This is why it’s so disconcerting that the shares are on pace for their worst month in a decade, having fallen some 25% from the peak.
What you want to take account of here is the extent to which the market looks like it’s becoming increasingly tethered to Apple’s fate at just the wrong time. The 10-day correlation between the shares and the S&P is near its highest of 2018.
By comparison, the correlation between the SOX and the broader market isn’t even close to that strong right now, having come down materially since October, when Semis dove 12% in their worst month since 2010.
Ultimately, one is left to wonder what this might mean in an environment where it looks increasingly likely that Tech and Growth are in for a prolonged period of underperformance, an epochal shift that the market has so far struggled to navigate.
Sorry to employ a bad (and horribly obvious) clichÃ©, but it looks like one bad apple is indeed poised to spoil the whole bunch.