Apple's warning, soft U.S. economic data heighten concern about
global slowdown
By Amrith Ramkumar
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 4, 2019).
Fears about the health of the global economy intensified
Thursday as downbeat news in the U.S. and around the world sent
stocks falling and pushed bond yields to their lowest level in
almost a year.
Investors were rattled by a rout in Apple Inc. shares, which
dropped 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.
Though 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%, with both benchmarks logging their
worst two-day start to a year since 2000.
The yield on the 10-year U.S. Treasury note, which often is
factored into mortgage rates and other consumer borrowing, slid
below 2.6% for the first time since January 2018 as it posted its
largest one-day drop in seven months. Since bond yields fall when
prices rise, the move is a sign that investors are shifting to
safer investments and bidding up government debt.
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 tech behemoths could face
fallout from weakening economic conditions and trade disputes that
threaten corporate earnings.
Many investors had largely discounted that possibility when
pushing valuations of Apple and Amazon.com Inc. to $1 trillion each
last summer. Analysts at the time said the duo and its peers would
be able to continue expanding their revenue growth even if tariffs
curbed economic activity outside the U.S.
But Wednesday's letter to investors from Apple Chief Executive
Tim Cook was a sign that the largest tech companies are also
vulnerable to economic shifts. 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.
Apple's 10% slide marked its largest one-day drop since January
2013 and pushed the stock to its lowest level since April 2017. The
company shed nearly $75 billion from its market value, roughly the
size of Qualcomm Inc., General Electric Co. or Morgan Stanley,
according to Dow Jones Market Data. From its peak in early October,
Apple has lost almost $430 billion in market value.
Combined with slumping raw materials prices, falling Treasury
yields and declining 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 in December cut their 2019 earnings forecasts on more
than half the companies in the S&P 500 index, 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 also will 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 said 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 range of investments -- worries
that spurred the worst December for U.S. stocks since 1931. The
price of 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 for December.
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 said.
"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.
"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."
Shares in Caterpillar Inc. and Boeing Co. -- industrial
stalwarts tied to global growth -- 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 to watch 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."
Corrections & Amplifications Caterpillar Inc. and Boeing Co.
shares fell more than 3.8% on Thursday. An earlier version of this
article incorrectly stated the companies' shares declined that much
on Wednesday. (Jan. 3, 2019)
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
(END) Dow Jones Newswires
January 04, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.