foxex: Cracked

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Apple's bad news sinks stocks

Markets Close

Dow
22,686.22 -2.83%

S&P
2,447.89 -2.48%

Nasdaq
6,463.50 -3.04%

VIX
25.16 +8.79%

INV Anxiety Index
106.36 High Anxiety

US 10-Yr Yield
2.554 -4.02%

Apple Cracked

Apple was the story today, and has been for the past 24 hours. On Wednesday, the company took down its revenue guidance for the prior quarter by $9 billion, blaming China, its slowing economy and the threat of a trade war for the shortfall. Investors punished the company, selling the stock like rotten fruit at the farmers market. By the end of the day, shares of the company fell nearly 10%, its worst day in six years.

This was enough to throw global markets into a tailspin, beginning in Asia overnight, extending through Europe and across the pond into U.S. markets. The DJIA shed more than 600 points or 2.6% while the S&P 500 and Nasdaq lost 2.8% and 3% respectively.

It was precisely three months ago on October 3, 2018, that Apple hit an all-time high, giving it a $1.1 trillion market value. Since then, it has lost $450 billion in market value. (James has a painfully beautiful chart below.) That was before it rolled out its new fleet of iPhones, watches and new iPad. Ruchir Sharma, the Global Investment Strategist for Morgan Stanley, put it this way in a column for the New York Times:

For the price of Apple you could have bought all the companies in three of the largest markets of Southeast Asia: Indonesia, Malaysia and the Philippines. Or all the public companies in the three largest markets of Eastern Europe — Poland, the Czech Republic and Hungary — nearly three times over.

It's an irrelevant but alarming statistic that shows just how large Apple, and Amazon, for that matter, have become. We already know how influential Apple is to the stock market. In the S&P 500 Index, which is a market cap weighted index, Apple is the second heaviest component next to Microsoft, accounting for more than 3 percent. (Microsoft has assumed the throne of most valuable company on the planet, as of late, by the way...) In the QQQ ETF, the largest technology exchange traded fund, Apple is the third largest component, accounting for 9.69% of the fund. In the Vanguard 500 Index fund, the largest mutual fund on the planet, Apple makes up 4.36%. Inside Warren Buffett's Berkshire Hathaway, Apple is the largest equity position, and Buffett recently added more to the portfolio. You get the point. Apple is pervasive -- not only in our hands - but across the investing world. When it falls, things break.

See how AAPL pulls up and drags down SPY, the biggest ETF that tracks the S&P 500, over the past year.

Why it Matters:

The lesson for investors is that over-concentration in any one stock or position is dangerous. That seems pretty obvious, but if I had a nickel for every time a friend asked me if they should just buy Apple and forget the rest... I'd be writing this from a yacht (or probably just not writing it at all). But that lesson wouldn't apply to other investors who tried to diversify their portfolios by buying mutual funds like the Vanguard 500 or ETFs like the QQQ. When Apple and its FAANG cohorts were running with the bulls, we all went along for the ride, happily. On the way down, it doesn't feel so good and there is not a lot for investors to do but watch and cringe. We could sell our positions in our mutual funds and ETFs, but why throw out the entire fruit basket because of...I'll stop here...or maybe I'll keep going - a bad Apple?

The reality is that if you own the market, you own Apple, Amazon and the rest. It used to be this way with General Electric and General Motors back in the day, but that was before the explosion of ETFs and the 401K revolution.

Your options are:

Balance your portfolio with cash, bonds or money markets
Buy ETFs and mutual funds that are more balanced in terms of their holdings
Buy individual stocks but never have more than 1% exposure to any one of them
Stay out of the stock market -- but that's no fun.

What's Next:

Kevin Hassett, an economic advisor to the President, today told CNN that Apple will be the first of many companies to warn about slumping sales due to the trade war. I'm not sure why a member of the administration would say that, but if he's right, this is a harbinger of very turbulent times ahead. Earnings season begins in a couple of weeks so we are in prime time for companies to guide investors to lower revenue and profit growth expectations before they announce their results. There is a two week period before a company reports earnings when they are not allowed to talk about their balance sheets which is called 'the quiet period'. That's coming up soon, so the next week or two will be key. Buckle up!

Just in case today's news made you hungry for more, here's some other stuff worth reading about today:

Outlook For Battered Biotech Stocks in 2019

Cheap valuations doesn't necessarily mean big gains.

Tesla Cuts U.S. Prices on All Vehicles, Shares Drop

Despite higher sales numbers, the price cut might mean softening demand.

Bristol-Meyers to Acquire Celgene in Deal Worth 74 Billion (NYT)

This deal is worth almost as much as Apple lost today in market cap. So that's a fun statistic.

Chart of the Day: Apple's Rise and Fall from $1.1 Trillion to $650 Billion