January 3, 2019

Stocks opened sharply lower after a profit warning from Apple Inc. (see below). The Dow is currently down 519 pts and the SPX is down 1.5%. Eight of eleven major market sectors are lower, led by tech (-3.6%) and industrials (-2%). The defensive sectors are in the green (real estate, utilities, consumer staples). European markets closed down about 1% and nearly all of Asia was down overnight. Commodities are mixed in early trading. WTI crude oil fell back slightly to trade around $46.30/barrel. Gold is up by .5%. Bonds are mixed in early trading. Corporates (both investment grade and junk) are lower, but Treasuries are moving higher. The 5-year and 10-year Treasury yields are down around 2.40% and 2.58%, respectively. Those are both around 1-year lows. The bond market is telling you there is no need for the Fed to raise rates during the first half of 2019.

Apple (AAPL) issued a profit warning yesterday. CEO Tim Cook said the company is seeing some unexpected weakness in emerging markets and it will impact the company’s first quarter results. In particular, the “shortfall” is on iPhone sales in China, where the trade war is taking a toll on demand. Traffic in retail stores is down, and foreign exchange was a “challenge” in the fourth quarter. Total quarterly revenue is expected to be about $84bil vs. Wall Street analysts’ consensus estimate of $91bil. That’s a big miss, and it means revenue will be down 4.5% from year-ago levels. The shorts jumped on the stock this morning and it’s down about 8.7% at the moment.

ISM’s US Manufacturing Index fell to 54.1 in December from 59.3 in the prior month. That decline is about twice as much as economists expected. The index is now at a 2-year low. The forward-looking new orders component of the index fell to 51.1. As a reminder, for any ISM or PMI data, 50.0 is usually the dividing line between expansion and contraction. So new business barely grew in December. It looks as though we’re seeing the first signs of economic impact from the trade war.

At the same time, payroll processor ADP says the US economy generated a net new 271,000 jobs in December. This figure is far above economists’ projection of just 180,000. The labor market is the strongest it’s been in decades, and seems to shrug off the trade war and rising political uncertainty. Tomorrow, we’ll see if the official Bureau of Labor Statistics jobs tally corroborates this strength.

CNBC Contributor Josh Brown went on a tirade on the network yesterday. It deserves to be paraphrased here. In his opinion, you shouldn’t attempt to trade the market here by following presidential Tweets or predicting a trade deal, or even looking at economic numbers. This market is incredibly hard to predict. Last year many investors over-weighted energy because economic growth was strong and under-weighted healthcare because the president was Tweeting about regulating drug prices. Both of those decisions didn’t work last year and that approach probably won’t work now. “You can’t win that game. You’re like a clown in the zoo.” The problem is that we’re in a very volatile market where a short-term approach won’t work well. A long-term focus and good diversification are the way to go. Mr. Brown then put the current investing environment into context. “Definitionally, we are in a bear market right now,” just like in 2015-2016. That previous 20% decline coincided with an earnings recession and a commodity crash, and…”we pulled ourselves out it without a systemic crisis.” He thinks we’ll do the same thing this time. Many of the fears back then were the same as they are now, but the worst case scenario didn’t come to fruition. That’s likely to be the case this year. We can have a cyclical bear market within the context of an broad economic expansion, and the wheels don’t have to fall off.

Tobias Levkovich of Citigroup predicts a 14% stock market return in 2019. His research says there is a 97% probability that the market will be higher a year from now. A “variety of leading indicator models” suggest we are not headed into economic recession. And “unless you really get the recession, the market does seem to be pricing in a lot of…upside opportunity…”

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