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Apple signals trouble - What to know in markets Thursday

Heidi Chung

Traders and investors will be watching Apple (AAPL) to see how bad news from the company affects the rest of the market.

One of the largest stocks in the world, Apple shocked investors on Wednesday when the tech giant slashed its Q1 revenue guidance. Apple now forecasts first quarter revenue of $84 billion, down from the initially estimated $89 billion-$93 billion range. Management cited weak sales in China and lower-than-anticipated iPhone revenue.

Shares tanked 8% in after-hours trade.

“We believe the economic environment in China has been further impacted by rising trade tensions with the United States,” CEO Tim Cook said in a statement. “As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed.”

While it was anticipated that the heated trade war between the U.S. and China would negatively affect Apple’s bottom line, the tech giant’s struggles will have secondary effects on other areas of the market such as the semiconductor industry.

Watch the manufacturing data

On the economic data front, market watchers can expect some crucial data released on Thursday.

Investors can expect weekly mortgage application and jobless claims data on Thursday morning. Construction spending data for November will be delayed due to the partial federal government shutdown.

However, investors will be paying close attention to the ISM Manufacturing data for December on the heels of disappointing Asian manufacturing data and the first survey of economic data in the U.S. on Wednesday that showed decelerating manufacturing growth. Economists polled by Bloomberg are expecting a drop in December to 57.8 from 59.3 in November.

The ISM Manufacturing Index is a key measure of national factory activity, and a reading above 50 indicates expansion in the sector. A reading below 50 signals contraction.

Morgan Stanley expects ISM Manufacturing data to surprise expectations to the downside. “If the incoming data do not do the heavy lifting for them, Fed policymakers will need to deliver a substantially more hawkish tone at the start of the year relative to market expectations if they wish to maintain optionality into the March FOMC meeting,” the bank wrote in a note to clients on Wednesday.

Nevertheless, Brad McMillan, chief investment officer for Commonwealth Financial Network, explained that while manufacturing data is expected to fall in December due to slowing global growth and a stronger dollar, “even with a moderate pullback, however, this would remain positive for the economy as a whole,” he wrote in a note earlier this week.

And here’s what caught markets correspondent Myles Udland’s eye.

Market commentary

2019 is here.

But for investors, the scariest year isn’t the one that lies ahead but a bygone year that keeps popping up in discouraging economic reports — 2016.

On Wednesday, U.S. manufacturing activity data from IHS Markit showed the pace of expansion in the sector hit a 15-month low in December while job creation hit its slowest pace in 18 months.

Optimism among businesses in the manufacturing business, however, erased all of its post-election gains and slid to the lowest since October 2016. “Output and order books grew at the slowest rates for over a year and optimism about the outlook slumped to its gloomiest for over two years,” said Chris Williamson, chief business economist at IHS Markit.

Earlier this week, we noted that some of the last rounds of survey data for 2018 were showing the best year for economic growth since the crisis was coming to an end with a whimper. In the last month, manufacturing surveys from the New York, Philadelphia, Richmond, and Dallas Federal Reserve banks all disappointed, while The Conference Board’s reading on consumer confidence in December also missed expectations.

In several of these reports, the year 2016 came up as a reference point for various “worst since” readings, indicating that the post-election, post-tax cut world of economic growth and booming stock prices is coming to an end.

The Richmond Fed’s manufacturing reading went into negative figures for the first time since 2016 in December. Meanwhile, consumers’ expectations for the economy fell to the lowest since 2016 in December, according to The Conference Board. And the Dallas Fed’s December reading on business activity hit its lowest level since 2016.

Economic data is a lagging indicator. It tells you what has happened while financial markets are trying to price in what will happen.

The S&P 500 fell just under 14% in the fourth quarter, the worst fourth quarter for the market since 2008 and the worst overall quarter for the benchmark index since the third quarter of 2011. The behavior of financial markets during the fourth quarter indicates that many investors were bracing for these kinds of negative data points in the months ahead.

As Neil Dutta at Renaissance Macro noted last week, the decline in markets over the last quarter indicates that incoming economic data has already been discounted by investors. In other words, markets are prepared for a run of bad data. Hearing “since 2016” over and over might not be the sort of bad economic news to really push the market even lower.

But it should remind investors that the current cycle that is often benchmarked to the post-crisis era — “second-longest expansion on record,” “longest bull market on record,” and so on — is really a smaller period of economic growth and stock gains that began after Trump’s election.

Business confidence, consumer confidence, and investor confidence all surged after Trump’s surprise win. Through the ups and downs of his presidency, many of these indicators remained near their post-election highs. At least until the final quarter of 2018.

The stock market is clearly in a downtrend. The economy is going to grow at a slower pace in the year ahead. And the question for investors is whether the entire post-Trump phase in markets and the economy that defined the last 26 months for investors has come completely undone.

Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.

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