On Thursday, the markets dropped precipitously for a variety of reasons, including Apple’s disappointing revenue projections, concerns over the Federal Reserve ‘s monetary policy, the U.S.-China trade impasse and weak U.S. manufacturing data. Stephen Stanley, chief economist at Amherst Pierpont wrote: “Factories are struggling with uncertainties around tariffs … as well as the appreciating dollar.”
Art Cashin, director of floor operations at UBS, said: “Up until now most of the bad news was out of China. Now the story is we are vulnerable and we are going to get hurt, too.”
In other words, the Apple announcement highlighted the interdependence of the U.S. and Chinese economies and the need for a trade deal between the countries.
On the domestic front, the National Association of Realtors reported that pending home sales fell to the lowest level since May 2014 and David Welch and Keith Naughton of Bloomberg wrote an article with the headline “Don’t be fooled: The U.S. auto sales party is coming to an end.”
It’s not all gloom and doom. On Friday, the Labor Department reported nonfarm payrolls rose by 312,000 and wages posted their biggest gain since the expansion began.
But Apple’s stock is down over 40 percent from its high after Apple reduced its quarterly revenue forecast for the first time in more than 15 years. Tim Cook, Apple’s CEO, blamed the weakening economy in China and reduced iPhone revenue. “If you look at our results,” Cook wrote in a statement, “our shortfall is over 100 percent and it’s primarily in greater China.” Cook cited the trade tensions between the United States and China, saying that they put additional pressure on the Chinese economy. China represents 15 percent of Apple’s revenue.
To put the Apple market-value plunge of $446 billion in context, it is more than: double the size of Wells Fargo’s market value; three times the size of McDonald’s; five times Costco’s; ten times the size of Raytheon’s.
The slowdown in the Chinese economy, the world’s second-largest, is causing concern across the globe. Its growth in 2018 is its weakest since 1990 and it might slow even further this year. Two factors have contributed: the darkening trade outlook and the Chinese government’s attempts to curtail risky lending after a rapid rise in debt levels.
Sales are expected to slow in China for U.S. companies such as Nike, Tiffany and semiconductor manufacturers.
“There might be some (Chinese) consumer backlash to American companies, a form of nationalism,” said Toni Sacconaghi, a Bernstein analyst.
On Dec. 1, President Donald Trump and Chinese President Xi Jinping agreed to hold off on further tariffs until March 1 so negotiators could work on a deal.
“There is a window of opportunity for the U.S. and China to come to a deal,” said Cesar Rojas, Citigroup global economist. “Growth is moderating in China, equity markets have been falling in the U.S. and China and this, basically, opens a window of opportunity.”
China is the United States’ largest import partner and is responsible for some $505 billion, approximately 21.6 percent of our imports, as of 2017. Our deficit with China is financed partly by capital flows from there. In fact, China is the United States’ largest creditor, holding slightly more than $1 trillion in U.S. Treasury securities. If China begins selling its Treasury holdings, it would drive bond prices down and yields up.
Several weeks ago, I wrote that the Federal Reserve should have waited before increasing interest rates in December. While I do not expect the Fed to retract that increase, I do believe that we will not see any further increases in 2019, despite earlier widespread forecasts calling for at least two. Fed chairman Jerome Powell said Friday on CNBC: “The Fed will be patient, flexible with rate hikes.”
Hopefully, we can resolve our trade differences with China because our economies are linked. An impasse could even force us into a recession late this year.
Originally published in the Sarasota Herald-Tribune
