Mitch on the Markets

January 14th, 2019

Chinese trade breakthrough could spark market

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Apple, Inc. stunned Wall Street last week when the company issued a rare cut to its revenue forecast for the upcoming quarter – the first time it has slashed expectations in more than 15 years. Markets don’t like downward earnings revisions, and no exception was made for Apple. The stock fell some -10% in the following day’s trading session.

In a statement, Apple essentially blamed most of its revenue revision on sluggish iPhone sales in “Greater China,” which made many market watchers’ heads spin. Many were already fearful of the impact of an ongoing trade war between China and the U.S., and Apple’s news seemingly moved investors to posture for the worst-case scenario: no trade deal with China, increased probability of a global recession.1

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Don’t let market fears prevent you from seeing strong economic fundamentals

There is no doubt that times are volatile and investor sentiment is mirroring this. But I suggest avoiding the urge to get caught up in these sentiments, and instead focus on the facts – economic data releases, earnings reports, and other economic factors!

To help you do this, we are offering all readers a look into our just-released Stock Market Outlook report.

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To be fair, data across the board does suggest weakening (but not outright contractionary) economic fundamentals in China. Walking through these Chinese economic data points one by one is not necessarily a reassuring exercise:

At face value, the data doesn’t look great. But here’s the kicker: For all this slowing in economic data readings, economists still expect China’s economy to grew 6.4% in the fourth quarter. This growth rate marks a deceleration from Q3, but it’s less alarming when you consider that Q3’s growth rate was 6.5%. In my view, investors are too often erroneously conflating “slowing” growth with negative growth. They are not the same thing.4  

My take from 30,000 feet is this: We’re seeing quite a bit of worst-case, negative growth scenarios being priced-into stocks, which to me opens the door for a positive surprise. And markets like positive surprises.

Eyeing Trade Talks

One area where I think we could be poised for a positive surprise is in trade. U.S. trade representatives, led by Robert Lighthizer, arrived in Beijing last week to push strongly for negotiations. On the table are issues over Chinese tariffs, the forced transfer of technology from American businesses doing business in China, and Chinese state subsidies to companies which create unfair competition. Lighthizer’s primary focus is on these structural trade issues.

On the other hand, because of President Trump’s fixation on trade deficits, Treasury Secretary Steve Mnuchin has a different goal of getting concessions from China to purchase more American goods, such as agriculture products and use of U.S. banking, brokerage, and insurance products and services. Lighthizer and Mnuchin’s goals are not necessarily in conflict, but they’re also not necessarily a unified front. It will be interesting to see how China works both lanes of demands.5

To date, we’ve already seen some signs of small victories and Chinese concession. China recently removed punitive tariffs on US-made cars and auto parts, and they also upped purchases of American soybeans. Also, just last week, China agreed to approve the import of five new varieties of GMO (genetically modified) crop seeds, which the U.S. – the world’s largest producer of GMO crops – has been working to achieve for years.6

These small breakthroughs, along with encouraging rhetoric from both sides, have arguably offered the equity market a glimmer of hope that a breakthrough is near. At this stage, with economic and political pressure mounting on both sides of the table, there’s a strong case that both countries are eager to arrive at a deal. Time will tell, but we see a positive surprise on the horizon.

Bottom Line for Investors

For Apple, the revenue issues may run a bit deeper than just a simple, linear connection between a slowing China and slowing sales. Global iPhone sales have been stagnant, and Apple’s share of the Chinese smartphone market has been troublingly falling – from 12.5% in 2015 down to 7.8% in Q3 2018. These company-specific revenue trends matter, but they are also not perfect indicators of the broader macroeconomic trends.7

What the market wants today, in my view, is some kind of deal and de-escalation between the world’s biggest and second biggest economies. If that ‘fear’ fades, which I think it will, the market should respond positively.

In the meantime, I suggest focusing on the fundamentals instead of the daily price movements, I am offering all readers our Just-Released Stock Market Outlook Report.

This Special Report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you’ll discover Zacks’ view on:

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

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Disclosure

1 The Wall Street Journal, January 2, 2019. https://www.wsj.com/articles/apple-revises-guidance-sees-lower-revenue-in-fiscal-1st-quarter-11546465050?mod=hp_lead_pos1

2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

3 The Wall Street Journal, January 2, 2019. https://www.wsj.com/articles/chinas-economic-downturn-takes-the-shine-off-its-resilient-consumers-11546513717

4 The Wall Street Journal, January 2, 2019. https://www.wsj.com/articles/chinas-economic-downturn-takes-the-shine-off-its-resilient-consumers-11546513717

5 The Wall Street Journal, January 8, 2019. https://www.wsj.com/articles/u-s-china-negotiators-narrow-differences-on-trade-11546959523

6 The Wall Street Journal, January 8, 2019. https://www.wsj.com/articles/u-s-china-negotiators-narrow-differences-on-trade-11546959523

7 The Wall Street Journal, January 2, 2019. https://www.wsj.com/articles/apple-revises-guidance-sees-lower-revenue-in-fiscal-1st-quarter-11546465050?mod=hp_lead_pos1

8 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

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