Apple shares tend to enjoy a nice pop between the announcement of a new iPhone and its launch date, UBS noted last week, but there was precious little excitement on show following last Wednesday’s iPhone 7 event.
Shares barely budged on Wednesday and fell hard over the following days after Apple announced it would not be releasing first-weekend sales figures, saying it was not a “representative metric for our investors”. Many analysts were rightly suspicious, given the question marks surrounding the iPhone 7. Changes are small and incremental rather than revolutionary, to use a word often bandied about in Apple circles; not releasing initial sales figures only reinforces the thesis that the iPhone is “mature”, as IDC’s John Jackson put it.
Technically, Apple looks fragile. Shares have been stuck in a downtrend since peaking above $130 in April 2015, making a series of lower highs and lower lows. The iPhone 7 goes on sale this Friday, with UBS noting shares traditionally retreat in the weeks following iPhone launches. Having rallied almost 20 per cent prior to Wednesday’s iPhone event, the stock looks vulnerable to another ‘buy the rumour, sell the news’ cycle.
Fed still likely to hold off on rate hike
One question will dominate market commentary next week: will the Federal Reserve hike rates?
The Fed had previously indicated it might hike up to four times this year, but that plan was abandoned following market instability in early 2016. Since then, stocks have rallied and volatility has receded, leading some to suggest markets could handle a September rate hike.
Last Friday’s market selloff suggests otherwise, stocks suffering their worst plunge since the Brexit vote following unexpectedly hawkish comments from Federal Reserve officials.
Even before Friday’s comments, some prominent voices were warning that markets were underestimating the potential for a September hike. “I don’t think it’s 100 per cent on, but I think it’s close to 100 per cent,” said iconic bond investor Bill Gross following the August jobs report. Allianz’s Mohamed El-Erian said the job figures “gave the green light” to hike; high-profile bond manager Jeffrey Gundlach warned last Thursday Fed members “want to show that they are not guided by the markets”.
Market data indicates the odds of a September rate hike rose from 18 to 32 per cent last Friday. Still, Gundlach is probably right in saying the Fed will hold off unless market odds hit 40-45 per cent. The Fed has tended to err on the side of caution and stay put; that’s not likely to change next week.
Volatility returns to stock markets
Volatility is back. After 51 straight days without a 1 per cent decline, the S&P 500 fell 2.45 per cent last Friday, resulting in the index’s worst week in seven months. The Vix, or fear index, soared 40 per cent, the 11th largest one-day surge in the past 25 years.
Market nerves had to return at some stage, given that the trading range over the previous two months had been the smallest in history.
Data is mixed as to where stocks go from here. Money manager Dana Lyons recently noted that narrow trading ranges near all-time highs tend to end with “an initial jolt”, just as happened last Friday. The uptrend normally resumes; looking at similar past market environments, all but one was higher three weeks later, stocks enjoying a median gain of 2 per cent.
However, huge one-day Vix spikes are normally followed by S&P 500 declines over the following 10 and 20 days, according to volatility expert Bill Luby; 50 days later, stocks tend to gain while performing below long-term averages.
The near-term outlook is murky, then, but traders won’t complain; after fighting sleep for two months, they will be happy that indices are finally moving again.
Bogle says save more to fight low returns
Whatever about the short run, the long run isn’t looking too promising, according to veteran investor John Bogle.
In a recent Wall Street Journal interview, Bogle cautioned that historically high valuations meant investors would be lucky to make annual returns of 2 per cent over the next decade.
Bogle’s forecast is a sobering one. Similar forecasts are often trotted out by equity bears but Bogle (87) is different. No market timer, he is a buy-and-hold advocate whose own portfolio consists of 50 per cent stocks. Investors have no choice but to stay invested and to save more, he says.
That’s wise advice. Still, it’s odd that an evidence-based investor such as Bogle continues to reject non-US investments. Citing political instability and currency changes, Bogle said he would “rather stick with the risks that I think I understand”.
However, European and emerging markets are much cheaper than US indices; global diversification is a wiser move than putting all your eggs in the US basket at a time of elevated valuations.
