Apple CEO Tim Cook holds up an iPhone as he speaks during a conference at the European Parliament in Brussels, Belgium, Oct 24, 2018. - Reuters
FEARS about the health of the global economy intensified Thursday as downbeat news in the U.S. and around the world sent stocks tumbling and pushed bond yields to their lowest level in almost a year.
Investors were rattled by a rout in Apple Inc. shares, which tumbled 10% following the iPhone maker’s warning late Wednesday that quarterly sales in China would fall far short of estimates. Amplifying those concerns were another round of soft U.S. auto sales for December and the largest one-month drop in a key manufacturing survey since the end of 2008. Just weeks after Federal Reserve officials penciled in two interest-rate increases in 2019, half of investors now expect the central bank to cut rates this year, up from about 10% a day earlier, CME Group data show.
After economic data largely held up during last quarter’s stock slide, Thursday’s figures forced investors to reassess the impact of factors including trade tensions and tightening financial conditions on the U.S. economy.
The Dow Jones Industrial Average fell 660 points, or 2.8%, while the S&P 500 dropped 2.5%, and both benchmarks logged their worst two-day start to a year since 2000. The yield on the benchmark 10-year U.S. Treasury note slid below 2.6% for the first time since January 2018, posting its largest one-day drop in seven months.
While worries of a slowdown have persisted for months, Apple’s first cut in its quarterly revenue forecast in more than 15 years crystallized Wall Street fears that even tech behemoths previously thought to be immune to weakening global growth could face fallout from changing economic conditions and trade disputes that are threatening corporate earnings.
Many investors had largely discounted that possibility when pushing valuations of Apple and Amazon.com Inc. to $1 trillion last summer. Analysts at the time said the duo and its peers would be able to continue expanding revenue growth even if tariffs curbed economic activity outside the U.S.
But Wednesday’s letter from Apple Chief Executive Tim Cook was a sign that the largest companies are also vulnerable to economic shifts, investors said. Tepid growth in China, which has powered much of the global expansion in recent years, and other emerging markets appears to be dragging on the U.S. Combined with slumping raw materials prices, falling Treasury yields and tumbling stock prices, some investors are seeing a worrying picture of growth world-wide.
“All of it is coming home to roost more directly in the United States,” said Jim Paulsen, chief investment strategist at Leuthold Group. “The slowdown is here and happening.”
Analysts cut their 2019 earnings forecasts on more than half the companies in the S&P 500 in December, according to FactSet, the first time that had happened in two years. Kevin Hassett, chairman of the Council of Economic Advisers, said in an interview Thursday with The Wall Street Journal that he expects other companies with exposure to China to also face challenges.
“There are signs that the Chinese economy is slowing sharply,” he said. “Multinational firms with profits in China are probably going to see at least that part of their profit picture sour a little bit.”
While some analysts think a resolution to trade friction between the U.S. and China could boost the outlook for global growth, others are skeptical. They say tariffs already imposed and the Federal Reserve’s four interest-rate increases last year hurt corporate activity. Shipping giant FedEx Corp. recently lowered profit targets for its fiscal year, also citing slowing economic activity abroad.
Thursday’s market turbulence was the latest illustration of those growth fears dragging down a wide range of risky investments—worries that spurred the worst December for U.S. stocks since 1931. Copper, an industrial metal often viewed as a growth indicator, tumbled 2.1% to its lowest level since August. The commodity is mired in a bear market, defined by a drop of 20% from a recent peak.
Weak economic data Wednesday and Thursday added intensity to continued choppy trading, analysts said, heightening the focus on Friday’s jobs report. The Institute for Supply Management said Thursday its manufacturing index fell to 54.1 in December, well below the 57.9 figure expected by economists. Economic figures in the U.S. are trending lower, undershooting targets in a manner not seen last year, analysts say.
“That’s having the alarm bells go off with many clients and investors,” said Torsten Slok, chief international economist at Deutsche Bank. “The cocktail of these things happening at the same time is what makes this situation more precarious.”
As the stock market’s selloff has continued, a number of assets are increasingly moving in tandem. Rolling correlations between the S&P 500 and the S&P GSCI commodities index and the S&P 500 and the MSCI All Country World ex U.S. index have generally stayed above 0.85 in recent weeks, according to a Dow Jones Market Data analysis of 20-day periods.
Correlation is measured on a scale of minus-1 to 1. A reading of minus-1 means two assets are moving perfectly in opposite directions, while a correlation of 1 means they are moving perfectly in tandem.
“There’s been nowhere to hide,” said Trip Miller, managing partner at Gullane Capital Partners, which owns Apple shares.
Mr. Miller said his firm would continue to hold its Apple stake, but he expects it will take a long time for the company to come up with new products to boost sales. Wednesday was the first time Apple had issued a revenue projection on a date it didn’t report earnings in at least 12 years, according to FactSet.
“Because of their size, when they tend to go through a cycle like this, I would expect it to take a year or more to come out of it,” Mr. Miller said. “This is not a quick fix for them to get back on the growth side.”
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Industrial stalwarts tied to global growth like Caterpillar Inc. and Boeing Co. each fell more than 3.8% Thursday, while the PHLX Semiconductor index of chip makers tumbled 5.9%.
Kevin Landis, chief investment officer of Firsthand Capital Management, said it has been frustrating watching the firm’s shares in Roku Inc. also slide on days when larger tech companies like Apple fall. The maker of streaming-media devices and software slumped 7.4% Thursday and is down nearly 60% since the start of October.
“It’s a really crummy feeling,” Mr. Landis said. “At some level everything is connected.” - WSJ
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