Late yesterday, Apple refreshed its guidance, warning investors to expect lower sales from the holiday quarter due to a slowdown in iPhone sales in China. It will be very interesting to see how it affects the markets today.

This could be looked at as an Apple-only event. Given the stock was already down over 30% from its peak earlier in the year, you may look at this as something the market was expecting. The global cellphone market is very competitive and Apple has been losing share to Samsung and Huawei over the last few years. Add in the trade dispute between the US and China, and it shouldn’t be a shock to hear Apple say the bulk of their current issues stem from China.

What the bears will focus on is the fear that this is another sign of a slowdown in global growth. Names such as Caterpillar and Boeing are key indicators of this sentiment. But, with the US 10-year bond yield already falling from 3.2% to 2.6% in the last few months, the market may have already priced in a slowdown. This bad news could be the evidence the Federal Reserve needs to halt its interest rate hikes, which in the end, would be good news.

This could also lead to more rotation from growth to value, which looks like it may have peaked earlier this summer (chart right: Russell 1000 Growth Index vs Russell 1000 Value Index; click to enlarge).

What may be lost behind the Apple headlines this morning is the huge acquisition in the healthcare space, with Bristol-Myers Squibb buying Celgene for $74B. This is a reminder that corporate balance sheets are strong and some companies are viewing the recent pullback as a buying opportunity. Today’s trading could tell us a lot about how the markets will act in the next few weeks. With the recent sell-off, a lot of bad news has already been priced in. If markets think this is a one-off event and is isolated to Apple, value investors may come back to the market and move us higher. But, leadership could be coming from sectors that have been ignored for many years.

In Purpose Global Innovators Fund (PINV), we have been out of the cellphone names for the past few months in favour of the software group. We haven’t held shares of Apple since this summer.

— Greg Taylor, CFA


Chart sourced to Bloomberg.
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