Apple’s fall is just a symptom – here’s what’s really troubling the market

Apple’s share price fell sharply yesterday. It’s the sort of news that the market would have shrugged off in the past. But not any more. John Stepek explains why.

Apple's iPhone isn't selling in the numbers it used to

Markets are rattled again.

This time, fear has coalesced around smartphone giant Apple. The world's first trillion-dollar company is no longer a trillion-dollar company, and yesterday it fell even further from regaining its crown.

Apple lost 5%, while the wider S&P 500 shed 2%.

This November rebound is looking pretty ropey right now.

It's peak iPhone all over again

The idea of "peak iPhone" has been a threat to Apple for as long as I can remember. It's no secret that the tech giant is dependent on its upmarket smartphones for the lion's share of its profits.

Apple's share price peaked at just over $232 a share at the start of last month. But at the start of this month, the company took a major hit as it gave a lacklustre outlook for the Christmas period, and also surprised markets by saying that it will no longer report on individual unit sales for iPhones, iPads and Macs.

Now, when a company stops reporting figures that it knows analysts pay a lot of attention to, we all know that can only mean one thing that it doesn't want them to pay attention to those figures any more. And the only feasible reason for doing that is because the company expects those figures to go in the wrong direction.

To be fair, iPhone sales have been pretty flat for the past three years. Peak iPhone sales actually came in 2015, at 231.2 million. In 2016, they fell to 211.9 million. In 2017, they rose to 216.8 million. And for the 2018 fiscal year (to 30 September) they hit 217.7 million.

And of course, Apple keeps selling more expensive versions of the iPhone. So sales might be flat, but revenues keep going up.

So you can see why Apple might want to kill off the focus on actual iPhone unit sales. The iPhone is a luxury item you pay a premium for the brand, even although you can get a phone that's just as good in pure power terms, for a lower price elsewhere.

(You might favour Apple's ecosystem or user-friendliness, but that's akin to enjoying the experience of shopping in a designer shop for a fancy handbag, when you can get one that holds more stuff in your local Asda.)

You could certainly argue that it's hard to be both a mass-market and a luxury brand, particularly once your new phones start to break the four-figure price mark.

Yet Apple has managed to have its cake and eat it on this front for years now, which is one reason that it became the world's first trillion-dollar company. So you can see why investors might not welcome the idea that iPhone sales might dip.

Which is probably why they reacted so badly when two iPhone suppliers issued gloomy updates yesterday.

Lumentum, which supplies sensors for iPhones, warned that one of its "largest industrial and consumer customers" had cancelled a lot of previously booked orders. The share price fell by a third.

Lumentum didn't name Apple. But it's not hard to take an educated guess. Particularly as another big supplier to Apple Japan Display also warned on profits due to "volatile customer demand", notes the FT.

What's really eating away at the market

How important is all of this stuff? The reality is that this isn't the first time in the history of the iPhone that wobbles over demand have hit Apple.

However, the problem is that the tone of the market has changed. Things it would have brushed off in the recent past are now bothering it. Apple is not the only one.

Goldman Sachs, for example, had a terrible day yesterday, falling by 7.5%. Investors are getting worried about the implications of the 1MDB scandal (basically an epic and complex scandal involving a Malaysian state investment fund which a couple of Goldman Sachs executives have been implicated in).

Again, this is the sort of news that markets in a different mood would have shrugged off. It's not as though Goldman hasn't been involved in controversy in the past. Yet investors are now so nervous that they are paying attention to any news that is less than perfect.

You can point to all sorts of bad news, but what it fundamentally comes down to is that central banks globally are tightening up, and the Federal Reserve is in the lead, which makes things even worse, because it means a stronger dollar.

Italy is mostly a problem right now because the European Central Bank is getting tighter, not looser. Minor disappointments and nasty but hardly unique scandals are problems right now because the Fed is getting tighter, not looser.

Until this year, the market felt comfortable with the idea that it had a great big mattress underneath it that if stocks fell too hard, they would be cushioned by fresh waves of cheap money.

That's no longer the case. And while my base case scenario remains that we have at least one last gasp left in this bull market, I reckon it's going to take some serious good news or at least a hint of a pause from the Fed to pull the market decisively out of this particular glum mood.


The British equity market is shrinking

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Cash rich and bored? Be careful what you do with your money
Investment strategy

Cash rich and bored? Be careful what you do with your money

As the pandemic has left many people with more time on their hands but little opportunity to spend, they have been speculating in the markets. But don…
19 Oct 2020
Will fintech change the face of banking?
Alternative finance

Will fintech change the face of banking?

Fancy new apps have become popular for everything from making a payment to buying insurance and shares. Should the big banks be worried? Simon Wilson …
17 Oct 2020
Jonathan Ruffer: tech stocks have become “long-duration assets”
Tech stocks

Jonathan Ruffer: tech stocks have become “long-duration assets”

As with bonds, tech stocks are now held not because of that they are, but because of what investors fear if they don't hold them, says Jonathan Ruffer…
16 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020
Last chance to secure a Bounce Back loan for your small business
Small business

Last chance to secure a Bounce Back loan for your small business

The government’s Bounce Back loan scheme will only run for another six weeks. Act now if you need to take advantage of it.
16 Oct 2020