Apple Stock Drags The Market Lower

Monday’s market action was like Friday’s action in that the S&P 500 closed nearly flat (down 0.1%) and the Nasdaq underperformed as it was down 0.52%. Adding to the weakness in the riskiest markets was bitcoin and ethereum which cratered in the afternoon. Bitcoin fell from $2,997 to $2,519. Some exchanges had bitcoin exceeding the $3,000 milestone. Ethereum fell from $415 to $344. The entire cryptocurrency space is worth $107 billion; bitcoin has a 40.4% market share. Even though cryptocurrencies are supposed to be a safe haven to run to if the dollar crashes, I think comparing them to high beta stocks is the correct way to view them because of the parabolic move upward they’ve had. At this point, speculators are dominating them.

I would describe the past two days as a cross between ‘risk off’ and sector rotation out of tech stocks. The Nasdaq had its biggest 2-day decline since December which isn’t saying much because it’s been going up in a straight line all year. About 75% of the decline in the Nasdaq has been caused by the big 5 tech names. As you can see from the chart below, Apple’s decline represents 28% of the move as Apple is down 6.17% in the past two days. This effect on the market is why I cover Apple stock as if it’s a macroeconomic factor. The iPhone release in the fall is the biggest product launch by far for the S&P 500. The stock could rally this summer as anticipation mounts and then selloff when the product is announced (buy the rumor, sell the news).

I don’t think the long-term fundamentals are sound for Apple because the smartphone replacement cycle is lengthening. It increased from 25 months in 2014 to 31 months in 2016. At first, it was thought that the ending of the two-year smartphone contracts could make people upgrade more quickly, but with the commoditization of the product, it may spur less upgrades as the devices become more future resistant. The end of the subsidized model by the carriers should pressure prices on devices. Consumer electronics prices have come down historically. As you can see from the chart below, Apple was able to up-sell customers in Q1 by offering more storage at the second upgrade level. For example, an iPhone 7 Plus 32GB costs $769; the next level for $869 has 128 GB. The increased price and storage could backfire on Apple by lengthening the upgrade cycle as many consumers upgrade when they run out of storage.