Apple (AAPL) Stock: Reaction To News Was Overdone

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Yesterday, Apple (AAPL) dropped dramatically, closing the day down just over 5.8% at 185.71, having been nearly three bucks lower than that at one point during the day. It was among the day’s biggest losers and easily outpaced the losses of the major indices.

When you consider the two pieces of negative news that hit yesterday though, that was no surprise. It seemed at times during the day that everything crossing the wire was designed to push AAPL lower, but investors should be wary of overreacting to headlines in both cases.

First there was the thing that drove the broader market down a couple of percentage points: the re-escalation of the trade war. The lack of an agreement with China meant that another round of tariff increases went into effect on Friday and, as has been the way of things so far, that in turn prompted retaliation from the Chinese.

As the Trump administration frequently points out, the problem with that from a Chinese perspective is that they are running out of things to tax. The massive trade imbalance that exists means that while America has a wide range of imports from China on which to impose tariffs, China imports relatively few U.S. goods.

They do, however, buy and manufacture Apple products, and that had traders and investors worried that the company would be punished disproportionately.

The other big negative for AAPL was more company-specific. The Supreme Court ruled that a group of iPhone users had standing in a case that alleges that Apple was in breach of anti-trust laws when it comes to the app store.

Both are real issues and it is logical that the stock would trade lower after the news hit, but if we take a step back, it looks as if the market has overreacted on both fronts:

A long, drawn out trade war with China would definitely hurt Apple. That country is a big driver of potential growth for them, given the level of saturation in the smart phone market in developed nations, and tariffs on both sides will have the effect of either squeezing margins or forcing up prices, neither of which is a good thing.

Still, a forward P/E well below the market average before the news broke indicates that despite fears abating over the last few months and the stock regaining some of the round lost at the end of last year, some of that was still priced in. To justify a big drop in the stock, you have to believe that this will drag on for a long time, but political realities suggest it won’t.

Given his domestic issues, Trump probably feels that having a “war” of some kind and an “enemy” to blame is to his advantage, but it could quickly turn into anything but. So far, Republicans have fallen into line behind the President on the trade issue despite once being the party of free trade, but cracks in that support are starting to appear.

Those cracks will widen as people begin to realize that, as Larry Kudlow admitted on Sunday, Americans ultimately pay for these tariffs. If support for the President weakens significantly in the Senate, he loses part of his defense against Congressional investigations and censure, and even impeachment becomes a possibility.

That is a pretty strong incentive to reach a deal.

The SCOTUS news has resulted in some almost hysterical reaction, but here too, the reality is that nothing much has changed. The case is actually around eight years old and it has taken this long to get a ruling on basically whether it is a case or not. What we heard yesterday was not a ruling on the case itself, but on standing. It will now go through the courts again, so any result will be way in the future and we still don’t know the outcome.

Yesterday was a bad day for stocks in general, but a particularly bad one for AAPL. You should remember, though, that markets usually overreact to headlines. It could be that either or both of these things could continue to weigh on Apple for a while, but the evidence suggests that even so, yesterday’s big drop was overdone.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks , Investing Ideas , Technology , US Markets
Referenced Symbols: AAPL

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