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  1. Home
  2. / Investing

3 Things to Worry About Besides the Paris Attacks

Red flags in equities were rising before Friday's horrific events.
By BRIAN SOZZI Nov 16, 2015 | 10:00 AM EST
Stocks quotes in this article: AAPL, RCL, CCL, FXI, SBUX, COH, IWM, MAR, HOT, CHH

It has certainly been a tough few days for humanity.

The attacks in Paris remind us all of the ruthless terror that still exists in many parts of the world, parts of the world we may never even visit or not so easily find on Google Maps. We, like most in the free world, take our safety for granted -- walking around cluelessly holding iPhones, wearing Beats headphones and sipping Starbucks pumpkin spice lattes. We complain on Twitter about Democrats and Republicans, mocking Donald Trump's hair and Hillary Clinton's email practices. But there are some scary goings-on in the world that warrant our attention -- and our praise for the people keeping us safe from atrocities.

Equities warrant attention as well. Although it's nice to see France's CAC 40 only down slightly today, and markets generally not sliding after the Paris attacks, red flags were rising before the horrific events of this past Friday. Some of the pain points could be linked to the Federal Reserve likely lifting rates at its December meeting. Another is simply a concern heading into the holiday season.

Apple's Stock Slide Continues

Shares of tech giant Apple (AAPL) have fallen about 6.5% in the last five sessions. What's weird about the plunge is the news flow around it, which one would think is favorable to Apple. Major retailers such as Macy's (M) and Nordstrom (JWN) posted horrible third-quarter results in large part because people are buying the new iPhone, the Apple Watch and downloading childish games from the App store. Want to know who is winning in retail today? It's Apple, at least that is the commonsense view, a view that apparently the market doesn't feel is entirely correct.

Even more odd is that the decline in Apple has arrived despite not much in the way of company-specific news. Sure, an Apple store in Australia not letting in two African American teens is disturbing and a true PR nightmare that CEO Tim Cook handled OK, but it's unlikely to make or break the company's quarter. What the market may be saying here is that weeks before the unofficial start to the holiday season, Apple, like many other retailers, will have trouble prying money out of the tightwad consumers. Households may upgrade their iPhones, but that is not what the market wants from Apple's holiday quarter -- the market wants a person to buy two new iPhones for the family and an Apple Watch with three different straps.

If Apple's shares continue to fall this week, I would be concerned that it's a signal on the success of the Apple Watch this holiday season and then the longer-term outlook for the device. Other than that, the only other thing I could think of that may be weighing on Apple's stock is the short-term outlook for China. I wouldn't be a buyer here; let the price action improve in what remains the most important stock in equity markets. About $110 a share is the next assessment point.

China's Stock Decline Resumes

The latest James Bond movie, Spectre, hauled in $48 million in China for the Friday-Sunday weekend, a record for a non-3D U.S. film release. Impressive considering the economic slowdown in the country, but not too surprising based on what cruise lines such as Royal Caribbean (RCL) and Carnival (CCL) are telling me about demand for lavish cruises in the country. The Chinese are still splurging; it just may not be as widespread as was the case earlier in the year or in 2014. That said, Chinese equities, which have calmed down after the bear raid that began in April, are again slumping.

The MSCI Asia Index is now down roughly 23% from its April peak -- technically in a bear market. The iShares China Large-Cap ETF (FXI) lost about 6% last week, underperforming the Dow Jones Industrial Average and S&P 500. Selling pressure came in spite of continued optimism that China's government would step up the pace of assistance to reawaken growth. Usually, murmurs such as those will boost Chinese stock markets, not send them reeling.

Many are forgetting the potential impact to global markets, as the Fed engineers a methodical rate hiking campaign in 2016. Easy money has been a boon to investors seeking to make large sums in emerging markets. Now that rock-bottom rates are likely to go away, those dollars could be taken and moved to seek more lucrative investments in less risky countries and situations. China's stock market deserves your attention this week; pay careful attention to how companies with significant Chinese exposure trade, such as Starbucks (SBUX) and Coach (COH).

U.S. Small-Caps Struggle

The Russell 2000 has gained about 4% from its August low, lagging the S&P 500's 8% gain and the 15% rise in the Dow. Over the past month, the iShares Russell 2000 ETF (IWM) has gained a mere 1%, underperforming the almost 2% gains in the S&P 500 and Dow. The small-caps are likely sending three messages to investors:

  1. The better-than-expected October employment report was more seasonally influenced instead of a signal the U.S. was awaking from a summer sleep. Not a good place to be as the Fed begins to lift rates.
  2. Quarters for multinationals have not started particularly well in the U.S., and cautious commentary could arise when execs present to investment banks in coming weeks.
  3. The holiday season will be no great shakes.

I wouldn't say we are in panic mode based on the action in small-cap stocks; it's just a divergence not many people are discussing, but they could be discussing it by the close of trading this coming Friday.

Finally, regarding Marriot's (MAR) proposed purchase of Starwood Hotels (HOT): It's a huge deal that would create a lodging behemoth. If I am a smaller operator in the space, such as Choice Hotels (CHH), I would be concerned. Scale is key in the lodging industry; having it helps to offer more attractive room rates to customers and an overall more affordable experience. A combined Marriot and Starwood would have significant scale, which could put pricing pressure on smaller operators and even, believe it or not, juggernaut Airbnb.

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TAGS: Investing | U.S. Equity | Stocks

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