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Apple’s Glum News About China Sales Sends Stocks Lower Last Month, Investors Seemed Too Pessimistic. Now, They Seem Prescient.
(about 2 hours later)
Apple gave stock investors another reason to worry about the Chinese economy, and they reacted on Thursday with a retreat from global markets. Maybe the markets were not overreacting.
The company surprised shareholders on Wednesday by warning of a slowdown in sales in China, where it said consumers had pulled back amid “a climate of mounting uncertainty.” As a result, Apple said its overall sales would be lower in the first quarter. The company’s shares fell more than 8 percent in early trading in the United States. With the United States economy posting solid numbers last year, the alarming signals coming out of stock and bond markets seemed out of whack with the real world. President Trump’s bellicose trade actions were a concern, of course, but hiring was strong and corporate earnings were surging.
Investors have recently heard a steady drumbeat of disappointing news about China’s economy, the world’s second-largest. Reports about manufacturing, exports, retail sales and industrial production have all shown evidence of weakness. But this week, companies have reported numbers that suggest investors were right to be worried about growth, not just overseas but also in the United States. Apple on Wednesday reduced its revenue expectations for the first time in 16 years, citing weak iPhone sales in China. Delta Air Lines on Thursday said a measure of its revenue would fall short of its forecasts. And the American manufacturing sector slowed sharply last month, according to a closely-watched index.
But Apple’s warning was one of the clearest indications yet of how the slowdown in China, fueled in part by a trade war with the United States, can hurt global businesses. Selling in the stock market continued. The S&P 500-stock index closed down about 2.5 percent, leaving it more than 16 percent below the high it hit in September. But perhaps the most notable move was in the market for government bonds, where investors park their money in times of stress or when they expect the economy to slow. The yield on the 10-year Treasury note, which moves in the opposite direction to its price, fell to 2.56 percent, the level it was at nearly a year ago.
[Read more about China’s consumers and their sagging confidence.] “On days like today people say, ‘Crud, I’ve got to buy tons of bonds,’” said Jim Vogel, a fixed income strategist at FTN Financial. “That’s driven by a large change in sentiment.”
Apple could be the first of many companies to issue such a warning, a top White House economic adviser said on Thursday. Important indicators still show the American economy is growing at a decent clip. A measure of employment in the private sector in December, released Thursday, was higher than expected. And analysts estimated that employers added about 180,000 jobs in December ahead of the Labor Department’s monthly jobs release on Friday.
“There are a heck of a lot of U.S. companies that have a lot of sales in China that are basically going to be watching their earnings be downgraded next year until we get a deal with China,” Kevin Hassett, the chairman of the White House Council of Economic Advisers, said during an interview with CNN. “That puts a lot of pressure on China to make a deal.” Still, companies and consumers are facing challenges that could make them more cautious about spending money. If they pull back, the economy will suffer. Apple’s warning provides strong evidence that the trade tensions with China are taking a toll. And if more indicators show the American economy stumbling, investors will become more convinced that the Federal Reserve’s recent interest rate increases are dampening activity.
The initial decline in stock markets on Thursday — around 1 percent on Wall Street — worsened as a reading of manufacturing activity in the United States, from the Institute for Supply Management, fell sharply, adding to concerns of a slowdown in the domestic economy. The ISM measure fell to its lowest in two years. In the coming weeks, scores of companies will report their fourth-quarter results. The White House appeared to be bracing for a torrent of bad news from corporate America.
By the afternoon, the S&P 500 was down closer to 2 percent. Shares in Asia and Europe were also lower, and investors shed technology stocks in particular. Kevin Hassett, the chairman of the White House Council of Economic Advisers, on Thursday said many American companies were likely to post disappointing sales figures until the United States strikes a trade deal with China. “It’s not going to be just Apple,” Mr. Hassett told CNN. “There are a heck of a lot of U.S. companies that have a lot of sales in China that are basically going to be watching their earnings be downgraded next year until we get a deal with China.”
Biotechnology stocks bucked the trend, rising sharply after Bristol-Myers Squibb said it would buy cancer-drug maker Celgene in a deal valued at $74 billion. Shares of Celgene rose 22 percent. (Bristol-Meyers shares were down 15 percent.) Corporate profits — and stock prices — are highly sensitive to global economic weakness. Foreign sales accounted for 45 percent of the revenues of companies in the S&P 500 stock index over the last five years.
Apple said its lowering of revenue expectations was tied to weak sales in Greater China — an area that includes mainland China, Hong Kong and Taiwan — for the quarter that ended on Saturday. There are signs of Mr. Trump’s policies beginning to weigh on domestic demand, too. The Institute for Supply Management said Thursday that its index of manufacturing activity fell sharply in December, the largest one-month drop since the last recession.
The disclosure added to investor worries that include rising interest rates and political turmoil in the United States as well as the continuing trade war, which Timothy D. Cook, Apple’s chief executive, cited in a letter to shareholders. The manufacturing index remained at 54.1 percent, a healthy level consistent with other economic data generally showing that the economy remains in good shape. But the downward trend in manufacturing contributed to a growing sense of unease on Wall Street about the future of the long-running expansion.
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in greater China,” Mr. Cook wrote. “We believe the economic environment in China has been further impacted by rising trade tensions with the United States.” “When it has seeped into the survey it probably means it’s three to five weeks old,” Mr. Vogel said.
[Read more about Apple’s announcement and its implications for the global economy.] Indeed, investors are so convinced trouble is coming that they are betting the Federal Reserve will abandon its plans to raise interest rates in 2019.
Apple had already been giving some investors pause, especially with regard to the iPhone, a signature product that helped the tech giant become the first American public company to reach a market capitalization of $1 trillion. But after years of explosive growth, iPhone sales have been sluggish for three years. Apple has maintained revenue growth by charging more for each device. A more important indication of the Fed’s views could come Friday morning, when the Fed’s chairman, Jerome H. Powell, is scheduled to answer questions at a public appearance with his two immediate predecessors, Janet Yellen and Ben S. Bernanke.
But many investors and analysts see growing evidence that iPhone sales may soon begin to decline rather than simply slowing. “There’s a belief he’s willing to back off, but we haven’t seen that yet,” Mark Haefele, global chief investment officer at UBS Wealth Management, said, referring to Mr. Powell. “If the Fed hikes rates in March, it’ll be a mess.”
Tech-heavy indexes led the losses in Asia, where many of Apple’s suppliers are based. South Korea’s Kosdaq fell 1.9 percent, and Taiwan’s Taiex fell 0.7 percent. Markets in Japan, another home to Apple suppliers, were closed for a holiday. Investors and corporate executives have experience with slowdowns in large overseas economies but they have not at the same time had to grapple with the effects of a trade war. In explaining Apple’s lowered sales forecast, the company’s chief executive, Tim Cook, said “the contraction in Greater China’s smartphone market has been particularly sharp.” Apple’s stock plunged nearly 10 percent on Thursday, taking its market value down to around $675 billion, well below the $1.1 trillion it reached last year.
Activity in other markets was more muted. Delta’s stock finished the day down about 9 percent.
In China, the Shanghai Composite Index was flat, and Hong Kong’s Hang Seng Index fell 0.3 percent. And on Thursday an ominous event occurred in the government bond market. The yield on the 5-year Treasury note fell below that on the 3-month Treasury bill. When moves like this have happened in recent decades, and stayed in place for a while, a recession has followed.
In Europe, the Euro Stoxx 600 had slipped 1 percent, dragged down by the technology sector. The CAC 40 in France and the Dax in Germany both slid 1.6 percent. London’s FTSE 100 was down 0.6 percent.