The stock market’s ugly finish in 2018 caused tons of hand-wringing and broad speculation as to what is actually happening: Is the decline just the typical stock market correction or is a recession imminent?
What we do know is that the decade-long bull market has officially ended, given that all three major indexes have dipped into bear market territory. On Thursday, an already-fragile market took a notable leg lower after Apple (AAPL) warned that revenue for its fiscal first quarter would be below guidance.
That fact that Apple lowered its own guidance — something the company has not done in two decades — caught my attention, particularly for the fact that it’s the holiday quarter.
Is Apple’s revenue warning a harbinger of slower global growth? Apple shares closed 10% lower Thursday at $142.19, marking the company’s biggest intra-day percentage fall in six years. The stock has lost 40% since reaching a 52-week high of $233 when the company's market value peaked at $1.1 trillion October. Apple’s market value is now $675 billion.
Among several factors, Apple CEO Tim Cook cited struggling iPhone sales in China and the strength of the U.S. dollar — the effect of which devalues overseas sales. Investors wasted no time exiting semiconductors and other tech stocks, sending the Nasdaq Composite Index lower by 3%. Thursday’s action is yet another reminder of just how delicate the stock market can be.
But is it time to start using the “R” word? Recessions, which many economists and institutional investors have been calling for, are a part of every economy.
But here’s the thing: Economists have predicted that a recession was imminent for the past five years, urging corporate executives to become corporate survivalists. Should they? The numbers don’t add up and they haven’t for a while. Not only is unemployment at historic lows, wages have been on the rise. Sure, we can debate whether they have risen fast enough. But the fact remains: they have risen.
Meanwhile, not only has inflation been tamed to a rate of around 2.5 to 3%, the Fed believes it is prudent to raise interest rates — something it has done nine times since the great recession of 2008. So which is it — is the economy too hot to handle or is a recession imminent? These two don’t often co-exist. They can’t, in fact. The “R” word will force companies reduce staff and slash overhead. That hasn’t happened.
So, what is going on?
The stock market is declining - plain and simple. Unlike the recession of 2008 or the market collapse of 2000, there is no clear sign of a bubble. As I have been saying since October, investors — and to a greater extent, computer algorithms — are reacting to factors such as the Fed’s monetary policy, the government shutdown and the trade war with China. The last of which is what has impacted Apple’s revenue forecast for the just-ended quarter, for example.
Bottom line: The market is re-pricing risk. Investors have enjoyed stock market gains for more than a decade. The recent selloff, something we have not witnessed for some time, has rattled some weak hands, which requires a different investing strategy. Investors should now focus on ways navigate what could be extended period of market underperformance. That’s not the same as a recession.