Trade Wars Are Not Easy to Win; Wall Street Bleeds on Bad News from Apple
Shares of Apple, Inc plummeted 10% to its lowest level in six years yesterday, taking Wall Street down with it and heralding a depressing start to the new trading year.
CEO Tim Cook's announcement Apple will badly miss its revenue forecast for its 2019 first quarter due to paltry sales and China's awful economic slowdown sent the Dow Jones Industrial Average plunging 660 points, or a 2.8% loss.
The NASDAQ composite followed suit by yielding 3% of its value and closing back in the bear market territory. Led lower by tech and industrial stocks, the S&P 500 sank more than 2.4% after falling by 6.2% (excluding dividends) in 2018.
The first two volatile trading days of the year are the S&P 500's worst two-day start to a trading year since 2000, according to analysts.
The unexpectedly bad news from Apple was compounded by the biggest one-month decline in U.S. factory activity since the Great Recession of 2008. The closely-watched ISM manufacturing index fell to a two-year low, confirming slowing growth and damage from Trump's trade war against China. ISM said manufacturing activity suffered a "sharp decline" in December but still showed some growth.
"Awful, and worse to come," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "Trade wars are not easy to win."
Analysts are now taking a dim view of rising corporate earnings in light of the more challenging global environment marked by slowing global economic growth. Apple's admission of failure in China confirms fears the slowdown in the world's second-largest economy is already hurting profits for multinational companies.
As a consequence of China's faltering economy, shares of China-sensitive stocks like Boeing, Tiffany's, John Deere and Qualcomm all traded lower. Trump's White House is also sounding the alarm bells over China.
Kevin Hassett, chairman of the White House's Council of Economic Advisers, said: "a heck of a lot" of U.S. companies with sales in China will follow Apple's footsteps by downgrading their outlooks.
"It's not going to be just Apple," declared Hassett.
Investors are retreating to the safety government bonds, sending yields plunging. The 10-year Treasury yield dropped to an 11-month low of 2.56% on Thursday, a sharp decline from 3.23% in November.
Cook offered some of the most painful evidence yet of the negative consequences of Trump's trade war. Cook said, "rising trade tensions" with the United States are hurting China's economy. He said this trade uncertainty "appeared to reach consumers," with customer traffic in China declining.
Before Cook's disheartening bombshell, Wall Street was expecting Apple's fiscal Q1 profit to rise 20% to $4.65 a share.
On Wednesday, Cook cut the revenue guidance for the iPhone, iPad, Macbook and digital services for Q1 2019 ending December to $84 billion, down from $91 billion. This means Apple's top line will likely fall nearly 5% year-on-year. The magnitude of this drop in the top line will be Apple's first since a 9% decline in Q4 2016 ending September.
Apple becoming the first trillion dollar company in August is now just a painful memory given its current state of affairs.