Back on November 27, we wrote a little something called “Rotten Apple: When One Company Becomes Synonymous With The Macro Story“.
The title spoke for itself. Apple is now the market bellwether par excellence.
After recapping the series of supplier guide downs that tipped decelerating demand for some of the world’s most important consumer products, we spelled things out for readers. Rather than paraphrase ourselves, we’ll just quote from the linked post above. Here’s what we said:
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.
We went on to remind everyone that Apple is front and center in the tariff debate. When Donald Trump threatens, for instance, to slap tariffs on phones and laptops from China, that’s 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 as late as November, it sounded like the President’s generosity might 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.
All of this compounds the company’s already outsized sway over the broader market.
Well, on Wednesday night, the company confirmed fears, slashing Q1 revenue guidance to ~$84 billion versus $89 billion to $93 billion previously. The proximate cause is, in a word, China. Here are the most important excerpts from the filing:
While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.
China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years. We believe the economic environment in China has been further impacted by rising trade tensions with the United States. 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. And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp.
Obviously, the company went on to put a generally positive spin on things, but this is mini-disaster. This underscores every single worrisome macro narrative weighing on investor psychology.
It confirms China’s slowdown (and during the same week that saw both the official and Caixin manufacturing PMIs slide into contraction territory), it casts considerable doubt on global growth more generally, it heightens concerns for Tech, it will invariably dent Apple’s shares to the detriment of the broader market and it sends a powerful message about just how deleterious Donald Trump’s trade war really is.
SPY and QQQ were immediately hit in after hours trading.
10-year yields pushed to 11-month lows on the news and suppliers plunged. Apple is down 7% coming off a halt.
“It’s clear that the economy began to slow there for the second half, and what I believe to be the case is the trade tensions between the United States and China put additional pressure on their economy,” Tim Cook told CNBC in an interview.
Although everyone probably knew this was coming and while we’ll leave it to analysts to decide just how “bad” or “broadly inline with expectations given the environment” this news actually is, the bottom line is that this is a decidedly bad omen at just the wrong time.