If the market’s resolution for the new year was to start with a clean slate and forget about the worries that piled up toward the end of 2018, that plan lasted fewer than two days.
Sure, traders bought into a sharply lower open on Wednesday and U.S. stocks actually ended with small gains.
However, after the close of the first trading session of 2019, Apple (AAPL) shocked investors with a revenue warning for the first time since 2002.
China Trade Talks Loom
The main reason that Apple cited for the lower quarterly sales was lower iPhone demand in China, heightened by tariffs and other trade issues.
That statement couldn’t be more timely, as a U.S. delegation is currently en route to Beijing, to begin trade talks ahead of a March 1 “deadline” to resolve issues and halt further restrictive actions from both sides.
In the meantime, China reported on Monday that its December purchasing manager index fell to 49.7, signaling a manufacturing contraction for the first time in nearly three years.
In the U.S, the December jobs report on Friday painted a much different picture. We added 312,000 non-farm payrolls in economy last month and the tallies from October and November were also revised higher by 58,000 jobs.
It remains to be seen if the Federal government shutdown, set to enter its third week over budget squabbles, will have a material effect on U.S. economic growth in early 2019.
Earnings Season Around the Corner
Apart from China, the issue with Apple warning about slower growth is that it’s the largest company by market capitalization in the world. At least it was, before a 10% decline on Thursday.
It is the largest component in many indexes and single-handedly accounted for more than 100 points of the decline of the Dow Jones Industrial Average on Thursday.
With Apple’s warning following cautious statements by FedEx (FDX) and Micron (MU) in late December, some dark clouds are starting to form around expectations for the upcoming earnings season, which kicks off on Jan. 10 with Delta Air Lines (DAL).
At least Delta will benefit from lower fuel costs than last year and should actually help add to the 13.7% overall earnings growth that is expected in the U.S. for the fourth quarter.
Deceleration Worse Than a Decline?
According to CFRA Research, this would be the 10th consecutive period of positive composite earnings growth in the U.S.
While the absolute figure remains positive, it’s a far cry from the 20%-plus growth in each of the first three quarters of 2018 and less than half of the 28.3% improvement in the third quarter. CFRA says that further deceleration is expected in 2019, to just 6.6% annual earnings growth.
So even if you can tune out the violent price action of late, the fundamental question as we enter 2019 remains: is 14x-15x a reasonable P/E for U.S. stocks, when the earnings part of that equation is losing steam, if not eventually headed lower?
Protecting Capital and Generating Income Despite Volatility
Waking up to triple-digit moves in the Dow each day can be grinding, especially with the Federal government closed over budget squabbles and trade talks with China looming on the horizon.
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