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Tech – Smartphone Market Saturation & Higher Prices Slow Upgrade Cycle For AAPL, Raising Sector Concerns As To Next Innovation Wave
Following AAPL’s negative December quarter pre-announcement investors have begun to doubt the prospects for continued tech sector growth as there is no readily apparent successor to the innovation wave unleashed with the iPhone’s 2007 introduction. As the tech sector’s secular growth prospects are muted, the leadership position in the stockmarket that the sector has enjoyed off the March 2009 low is clearly at risk and thus making the stockmarket as a whole vulnerable to profit-taking. While some analysts are stressing that AAPL’s shortfall is indicative more of consumer weakness in China, the fact is that trouble ahead was clearly indicated when AAPL announced following September 2018 quarter results that it would no longer disclose product unit shipment data. A narrowing of disclosure scope is generally a sign of company weakness, not strength. In any event, smartphone market saturation raises challenges not just for AAPL, but for all the companies that have gained as part of the broader ecosystem that was fed by the rise of the smartphone economy. Against the backdrop of an innovation wave hiatus, investors are right to be concerned as to whether future growth prospects will support current sector valuations. That said, the ongoing efforts by AMZN to transform the retail sector have a way to go and the introduction of 5G wireless communications may prompt upgrade cycles, so look for tech sector growth there.
Market – It’s Not Just AAPL & China, Domestic Data Points Are Similarly Unfavorable
Meanwhile, as White House Council of Economic Advisers (CEA) member Kevin Hassett stated AAPL will not be the only company showing 4Q18 earnings weakness due to China, it is clear the pall of trade negotiations will likely hang over the stockmarket until the 3/2/19 agreement deadline. This is likely to feed into companies offering lower 2019 EPS growth guidance. Note that recent S&P500 4Q18 EPS growth forecasts of +12.4% are may come in more likely with an actual result of +10%, in either case representing a marked deceleration from the +25% growth seen during the first 3 quarters of 2018. Note that going into 4Q18 earnings season, consensus S&P500 2019 EPS growth is forecast at +8% and the risk is that management guidance may be revised down to 0% growth. Meanwhile, sensitive economic indicators such as the ISM manufacturing survey have come in short (12/18 54.1 vs. 11/18 59.3) with particular weakness in new orders (12/18 51.1 vs. 11/18 62.1). Not to say that airline stocks are the canary in the coal mine, but Delta Airlines (DAL) shares plummeted -9% when it announced 4Q18 unit revenue grew +3%, under its previous +3.5% growth guidance. All good reasons why the stockmarket closed yesterday on its lows.
Strategy – If Wishing To Pull The Trigger, Wait Until You See The VIX At A High
With the broader market now trading at price levels not seen since early September 2017, investors might be inclined to “buy the dip”, especially as the market is now discounting a 48% chance the Federal Reserve will actually lower interest rates at some point during 2019. However, one should bear in mind that Federal Reserve is still engaged in shrinking its balance sheet at a $600bn annual rate and in the process investors should understand that the price level of the “Fed Put” is being adjusted downwards. Consequently, in trying to find a stockmarket entry point, there is the problem of “trying to catch a falling knife”. The VIX index traditionally offers some indication of the stockmarket being oversold. Yet, even with today’s -2.5% decline, the VIX at 25.5 still stands well under the 12/24/18 level of 36.1, thus leaving uncertainty as to whether the market has reached a tradeable low. Items to consider today will be the December 2018 jobs report (consensus +182,000) and Federal Reserve Chair Jerome Powell’s comments when he speaks in Atlanta, GA starting at 1015ET along with his predecessors Janet Yellen and Ben Bernanke. Should Powell be silent, investors will look with interest to his Thursday 1/10/18 Economic Club of Washington address. For now, with all the cross-currents at play, this is a volatile market and likely to remain so during 1Q19.