The Big Picture. That's what investors need to remember on trading days like today's. While Apple's (AAPL) profit warning was truly a shocker -- the first time in 16.5 years the company had issued such a guidance release, according to Bespoke Research -- the forces pressuring global equity markets today are more macro than micro.
To put it simply: the yield curve looks horrible. The table at the bottom of this report contains the details, but with a near-inversion of the 12-month/10-year Treasury yield spread the market's demand for stocks is understandably pressured. As I first learned as a 20-year old summer intern on Wall Street, the stock market follows the bond market. Fast forward almost 30 years, and those words are as true as ever.
So, this is not the time to be initiating new positions in equities. You can time the markets. Anyone who tells you otherwise is a buffoon and should be ignored.
Over time, of course, the stock market has been a tremendous creator of value. The problem is that periods of higher-than-average returns have to be followed by periods of lower-than-average returns. That's how averages work. The pullbacks tend to be much shorter in duration than the expansions but also much more pronounced on an annualized return basis.
So, by avoiding pullbacks, you can create above average returns. How do you see a pullback coming? Follow the bond market. How do you follow the bond market? The global bond markets dance to the tune of the world's central banks led by the largest, the United States Federal Reserve, and its much-reviled (of late, anyway) Chair Jerome Powell.
The Fed began its program of quantitative easing (QE) in December 2008 as a way to increase liquidity in the financial markets after the collapse of Lehman Brothers and the corresponding credit crunch. In retrospect that was an attractive buy point for U.S stocks, although the rebound took about 18 months to solidify.
With zero fanfare, in its October 2017 meeting, the Fed began quantitative tightening (QT.) This is a technical move by which the Fed each month is allowing its Treasury holdings to mature -- Powell quantified the impact of QT at $50 billion per month in his last press conference -- and not replacing them, effectively shrinking its balance sheet.
So, as with quantitative easing, the impacts of the Fed's normalization policies -- both by shrinking its balance sheet and raising interest rates -- were not felt immediately in the equity markets. There is always a lag period, and in the U.S the markets peaked around Labor Day of 2018, about 11 months after the QT program began.
So, that goes back to another lesson I learned during my summer intern days from reading the works of the legendary Wall Street guru Marty Zweig. I was actually fortunate to meet Marty at the end of that summer, and while he is sadly no longer with us, his mantra, uttered in his distinctive baritone, stays with me to this day.
"Don't fight the Fed!"
The Fed created an environment in which Facebook FB could trade at $240, Apple AAPL at $220 and Netflix NFLX at $420, and it is that very same Fed that has created an environment in which each of those names has fallen at least 35% in less than 6 months time.
That's real money! Not Real Money, this website, but real losses in real investors' portfolios.
I believe there is more downside to come in 2019 and have offered the "middle path" of investing in tech bonds instead of tech stocks in prior RM columns. Locking in 4% may have seemed excessively conservative last week, but today that strategy is looking pretty darn good.
But what about Ronald Wayne? Yes, the guy who sold his 10% stake in Apple for $800 in April, 1976. FOMO, as the millennials say, Fear Of Missing Out. Based on media accounts Mr. Wayne is still alive and living in Pahrump, NV, and seems like a pretty happy guy. As someone who had already seen a business fail (slot machines,) Mr. Wayne was understandably nervous about the business his two friends from Atari, "the Steves" (Wozniak and Jobs), had put together.
That's the problem with FOMO when applied to the stock market. It is actually possible to "miss out" on crashes as well as booms. Yet virtually everything I read on financial websites (other than RM) is geared toward artificially creating booms in individual stocks.
Crashes and booms are both caused by macro factors. Before you fall in love with any individual stock, you should repeat Marty Zweig's mantra: Don't fight the Fed! Don't fight the Fed!
U.S. Treasury Issue
1/3/2018 Yield (%)