Tech heavyweight Apple (AAPL) is down 9% in December, falling out of a multi-month consolidation range on swirling worries about iPhone demand and sales in China.
Shares of its component suppliers — such as Skyworks (SWKS) — are also getting slammed. Morgan Stanley, in a note to clients, highlighted headwinds from higher prices in global markets and a maturing market for smartphones.
I was in an Apple store in Seattle last weekend during the holiday and was shocked at the lack of shoppers; the space was half-empty, which is rare on any day, much less Christmas week. I was impressed, however, with the new iPad Pro. That is a slick tablet, with a beautiful big screen, light weight and surprisingly effective attachable keyboard. It’s being labeled a flop due to slow sales, so don’t be surprised if Apple lowers the price to get sales moving.
Santa in the Slow Lane
Analysts at Bespoke Investment Group published an interesting chart that showed where the current year-end rally fits among all December rallies of the past. Short answer: It’s way behind.
The chart showed composite indices of the S&P 500 through the trading year since 1928, and you could clearly see the “Santa Claus” rally in December is one of the stronger stretches of every year, with sharp gains regularly coming in the last couple weeks of the trading year. So far, though, the rally has been muted as December is down 1% so far with just a few days to go.
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Seasonal year-end strength has typically already started by now in a big way. It would be somewhat unusual for stocks to start late Christmas deliveries at this late stage, the analysts conclude, but it could happen, though obviously the later we get, the less likely a major rally from here out.
Bespoke concludes by noting that the Santa Rally isn’t some law of nature. There are plenty of years (40% over the last quarter century) where stocks fell in December, and there’s no guarantee that this won’t be one of them. And keep in mind that when stocks don’t lift as expected when they have a seasonal tailwind, they typically are even more muted later when they don’t.
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I have been groping all weekend to make sense of the past year — a period in which the S&P 500 was essentially flat, with brief, modest excursions higher and lower. The main idea that I have distilled, from a sector point of view, is that the year was actually fine for technology and health care, which are our two favorite groups of the past two decades anyway. And the year was mostly dragged down by the shares of companies in energy, materials, conventional retail, industrials and utilities. Financials were a modest drag but ended the year flat.
From a market capitalization point of view, this year was all about the biggest large caps. The SPDR S&P 100 (OEF) finished up 3.5%, the Nasdaq 100 ($NDX) rose 8.5% and the Vanguard Megacap fund (MGK) rose 4.5%, while the Russell 2000 small-caps ($RUT) sank 4% and the mid-caps sank 3%. Even now the Russell 2000 iShares (IWM) and iShares Midcap (IJH) are right around their August levels after not participating much in the late-year rally.
Everyone knows by now that the so-called FANG stocks — Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and Google (GOOG) — masked a lot of underlying weakness this year. But what do you do with that knowledge? No one is going to hold just four or five stocks as their entire portfolio. You would have to dramatically overweight those guys to get much oomph out of the idea.
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And by the time you decided to do so, it would probably be too late. I mean, earlier in the year, you would probably have put Apple (AAPL) on that list, but it’s ending the year flat after sinking steadily since its July earnings release date, when it gapped up and left behind an “island reversal.” (After Nike also gapped up and then crashed last week, you have to wonder if the same fate will befall this darling as well.)
Focusing on reductive ideas like the FANG stocks may not be wise, but I will say that I do expect SPDR Technology (XLK) and SPDR Health Care (XLV) to continue to outperform the rest of the market in the coming year. The valuations are not high enough to merit concern, and this is where most of the innovation, creativity and life-enhancing ebullience are centered. There will be ups and downs, but generally stock prices follow earnings growth and PE expansion, and earnings growth and PE expansion derive from new discoveries and upside surprises.
Best wishes,
Jon Markman
P.S. Gold, silver and oil are bottoming right on schedule just as Larry Edelson predicted they would — all in preparation for a powerful bull market in 2016.
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