In the short year that has transpired so far, there have been two key themes in the equity market. First is that the so-called “Santa Claus Rally” failed to materialize. The second is that Apple (AAPL) has been hit by sequential downgrades. Neither is a positive, but neither is all that surprising.
The absent Santa Claus rally has gotten a fair share of media attention. There is an old expression: “If Santa Claus should fail to call, bears may come to Broad and Wall.” [The NYSE is located at the corner of Broad and Wall Streets.] In short, if we don’t get a rally in the last five trading days of a year-end and the first two days of a new year, it bodes poorly for the rest of the year to come. I won’t get into the nuances, and instead will recommend two columns that do a good job of explaining the phenomenon and the consequences of its misfire, one by Bob Pisani of CNBC and the other by Jared Blikre of Yahoo Finance. The bottom line is that most of the time we see stocks rally during the period in question, since it encompasses the lightest volume week of the year (“don’t short a dull tape”) and a short period when new money might be put to work. Even then, the relatively rare times that it doesn’t work – only 12 times since 1969 – have an imperfect track record. It fails more often than it works. I think of the words of the character Brian Fantana in the movie “Anchorman”: Sixty percent of the time, it works every time.”
One of the reasons why the market has been under pressure this week is that the most highly capitalized stock, AAPL, has been getting downgraded by various brokerage firms. Considering that AAPL is about 6% of the S&P 500 Index (SPX) about 9% of the NASDAQ 100 (NDX), a significant decline in that share becomes a significant headwind to those major indices. But it also means that AAPL benefitted immensely from the recent market run-up. According to Bloomberg data, over $32 billion flowed into SPY alone, with billions more flowing into other indexed ETFs. By necessity, over 6% of that money needed to be invested in AAPL. It became a huge beneficiary of the “weaponized FOMO” that occurred as portfolio managers raced into high performing equities and individuals chased momentum into year-end.
Yet the downgrades should not have come as a huge surprise to those who have been paying close attention to AAPL’s top and bottom lines. After AAPL’s last earnings report, we questioned what happens “when the biggest growth stock doesn’t grow”, writing:
But for AAPL, investors should be concerned about sales overall. Although total revenues rose sequentially, breaking a three-quarter downtrend, this was the fourth quarter in a row when revenues fell on a year-over-year basis.
Quite frankly, it is hard to reckon with a growth stock whose sales aren’t growing. AAPL is a cash-generating machine, with over $20 billion in positive cash flow every quarter. That has led to a cash hoard of over $160bn. With short-term rates at 5%, that can be a significant contributor to the company’s bottom line, but investors aren’t paying 28X earnings for a company with no revenue growth and only modest EPS growth. AAPL earned $6.13 per share in 2023 (it’s fiscal year just ended); it earned $6.11 in 2022. Is that a growth stock? It will take some time for the market to decide whether to reclassify AAPL as a value stock.
In November and December, investors were in no mood to reclassify AAPL as a value stock. But in January, some analysts have made moves in that direction.
If you are particularly concerned about the recent two-day swoon, or the lackluster seven-day performance, remember that it is too early to draw any conclusions about the year to come – let alone about how tomorrow’s jobs report might be received. Also consider whether you questioned any part of the recent two-month rally. We were up nine weeks in a row – a great run – and if you failed to express any skepticism on the way up, then it’s unfair to question a relatively minor pullback. There are plenty of reasons to question whether markets got ahead of themselves – we laid several out yesterday – and I’d rather focus on the broader reasons why investors might need a rest after a nine-week binge.
Not to dismiss Santa, but the AAPL story is one that has broader implications for valuation and growth than a historical quirk with a solid, but uneven track record.
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