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September 8, 2023 – The reported impending ban on the use of iPhones in Chinese government offices sent Apple’s shares reeling and infected the entire tech sector, sending stocks lower this week. While China’s government hasn’t officially commented, this news is yet another sign of the deterioration of economic cooperation between the U.S. and China. Economically, that can’t be a good sign.

//  by Tower Bridge Advisors

Stocks moved lower again yesterday. For a change, it wasn’t the bond market leading the stock market. Yields stayed contained within the upper end of their recent range. Rather, at a time where economic and corporate news is limited, investors have adopted a sour mood where both good news and bad news evoke negative reactions. Good economic news increases odds the Fed will still have to increase interest rates. Bad news raises fear of recession.

This week a new worry has emerged. Unconfirmed reports suggest Chinese government agencies will no longer allow the use of iPhones at work. Some reports suggest the ban could be wider. So far, there has been no official comment. Given that Apple# is the most valuable corporate enterprise in the world, any news that is bad for Apple is bad for markets overall. China’s supposed actions come as its major smartphone manufacturer, Huawei, introduces a new phone with a new chip. Western nations, including the U.S. have banned Huawei phones believing that the company is sharing customer confidential information with China’s government. Most Westerners feel safe assuming that President Xi is the de facto Chairman of the Board of all major Chinese enterprises.

For years now, economic cooperation between China and the U.S. has deteriorated as both invoke tariffs and accuse the other of misusing information. It is unclear how far China is ready to go to ban some or all of Apple’s activities. Apple is a major employer in China and its phones dominate the high end of the cellphone market. In a nation where loyalty to the Party is important, the impact of even partial restrictions could have a significant impact. For now, one shouldn’t overstate how far China is willing to go restricting the use of Apple phones. But China’s recent actions have left many scratching their heads. On one hand, several high-level U.S. cabinet officials have made recent trips to China. Little overt progress has been made to improve relations, but at least the two sides are having conversations. But then comes the news related to Apple, together with President Xi’s absence from the upcoming G-20 summit.

China has real problems. Its working age population has started to decline. Exports are shrinking. Youth unemployment has gotten so bad (last reported at over 20%) that the government has stopped reporting figures. Several huge real estate empires are teetering, barely making debt payments on time. President Xi is starting to feel pressure from within as economic growth slows. Yet many steps, including the rumored ban on iPhone use in government offices, serve to further isolate China from the West. With India and other emerging nations on the rise and threatening to take business from China, the Chinese have to turn to countries like Russia, Iran, and Saudi Arabia for support. Nations like Saudi Arabia and India want to do business with both China and the West without alienating either side, a tough balancing act. But the tit-for-tat gamesmanship going on between China and the U.S. hurts both sides economically.

It isn’t my place to offer any political conclusions. But it is my place to discuss economic consequences. Suffice it to say, it appears conditions are worsening, not improving. It seems obvious, given visits by heads of Treasury and Commerce, that the U.S. wants to separate national security interests from economic interests. Easier said than done. Logically, there is no near-term threat to American companies like Starbucks or Coca Cola# operating in China. But concerns worsen as the news front gets uglier.

As for Apple itself, China is an important piece of Apple’s business. Simply banning the use of iPhones in government offices will have minimal economic impact. But what comes next is a bigger worry. Apple’s stock has been fully priced for some time. Some correction was inevitable and logical. Globally, the company still has big opportunities. Next Tuesday, the company is expected to introduce the next generation of iPhones and other products. Rumors suggest there will be a price hike of $100 at the high end, confirming a belief within Apple that customer loyalty will remain intact. With that said, customers could also react by holding onto their phones longer, making each upgrade cycle less significant.

The correction in Apple’s stock has had ripple effects this week on other tech names, with most of the weakness concentrated within the semiconductor space. What’s bad for Apple is bad for every company that touches the Apple ecosystem. The whole sector spiked earlier this year on hopes that generative AI would accelerate growth. Now, fears are rising that Chinese isolation, whether caused by us or China itself, will have a dampening effect on growth. So far, stocks have reacted to rumors more than facts. The facts will emerge over the coming months, facts that may include further retaliatory steps from both sides. Any trade war would be bad for both.

Trade war sounds bleak. It is. But at least for now, we are talking about skirmishes, not an all-out blitz. Nonetheless, what has happened to date is reflected in trade data, and slower growth worldwide. Both the U.S. and China are still growing, but trust is deteriorating, not improving, which is a bad sign. The Apple news is only a piece of the puzzle. It could be nothing more than a way to help Huawei get back on its feet, but it has made a bad impression on world markets. President Xi’s decision to stay away from the G-20 summit won’t help even if it gives the U.S. more opportunities to improve relations with the remaining 18. How this all plays out will be important for markets to watch and analyze.

Pink, born in Abington, PA, is 44 today.

James M. Meyer, CFA 610-260-2220

Additional information is available upon request.

Tower Bridge Advisors manages over $1.7 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « September 6, 2023 – Stock prices remain slaves to interest rates. A spike in rates the past two days has put downward pressure on stock prices once again. Higher oil prices add further pressure. With little economic or corporate news coming that should change sentiment, the key data in the weeks ahead will focus on the pace of decline in inflation readings.
Next Post: September 11, 2023 – Spectrum and Disney are locked in a battle over how TV content is delivered to the home. Both want a bigger economic piece of the pie. The battle reminds us of the strike by actors and screenwriters. All are fighting for a bigger piece of a smaller pie. These battles are part of a process, one where the consumer will be the winner in the end. But before the wars end, there will be lots of carnage as economic reality sorts out those parts of the puzzle that cannot survive. »

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  • September 22, 2023 – Stocks fell sharply, continuing a negative reaction to the outcome of Wednesday’s FOMC meeting. While rates remained unchanged, the committee expressed a bias toward increasing rates again at the next meeting that ends November 1. In addition, the dot-plot of projections from Committee participants suggested only one (net) rate cut between now and the end of 2024. While short-term rates barely budged, yields on 10-year Treasuries rose by about 15 basis points, suggesting tougher economic conditions ahead, higher rates for longer and, by extension, lower P/E ratios. Lower P/Es mean lower stock prices.
  • September 20, 2023 – Today concludes the 2-day FOMC meeting. No change in rates is expected but investors will parse every detail of the post-meeting releases as well as comments from Fed Chair Jerome Powell. Recent data suggests both inflation and the economy are slowing. The ideal soft landing is still within reach, but it is also quite possible that the economy might slip into recession over the next few months.
  • September 18, 2023 – Markets are directionless, torn between better economic activity and an increase in storm clouds from labor unrest to China. What is crucial is the future trend for interest rates. Investors will parse this week’s FOMC meeting for clues, but probably won’t get a much clearer picture for their efforts.
  • September 15, 2023 – Auto workers are out on strike. So far, markets don’t care. They probably won’t care overall, unless the strike becomes extended. Elsewhere the public offering of ARM Holdings signals a healthier IPO market. Instacart is likely next. Traders are waking up from the late summer doldrums, but valuations, high bond yields and rising oil prices probably suggest more sideways churning ahead.
  • September 13, 2023 – Today’s focus will be on the August CPI report. The headline number will be disturbing thanks to higher oil prices, but core inflation is likely to stay muted. Bond yields have been creeping higher and are back at the top end of recent trading ranges. Any breakout to higher yields would be disturbing to equity markets.
  • September 11, 2023 – Spectrum and Disney are locked in a battle over how TV content is delivered to the home. Both want a bigger economic piece of the pie. The battle reminds us of the strike by actors and screenwriters. All are fighting for a bigger piece of a smaller pie. These battles are part of a process, one where the consumer will be the winner in the end. But before the wars end, there will be lots of carnage as economic reality sorts out those parts of the puzzle that cannot survive.
  • September 8, 2023 – The reported impending ban on the use of iPhones in Chinese government offices sent Apple’s shares reeling and infected the entire tech sector, sending stocks lower this week. While China’s government hasn’t officially commented, this news is yet another sign of the deterioration of economic cooperation between the U.S. and China. Economically, that can’t be a good sign.
  • September 6, 2023 – Stock prices remain slaves to interest rates. A spike in rates the past two days has put downward pressure on stock prices once again. Higher oil prices add further pressure. With little economic or corporate news coming that should change sentiment, the key data in the weeks ahead will focus on the pace of decline in inflation readings.
  • September 1, 2023 – We all hear about the lag effects of higher rates. That lag varies from sector to sector. When rates first started to rise, it affected home buyers immediately. But for those who financed or refinanced debt in 2020 or 2021, the impact was delayed. For some, that cheap debt is starting to come due. Over the next couple of years, debt service is going to become a bigger and bigger cost of doing business.
  • August 30, 2023 – At a time on the calendar when there is a dearth of economic and corporate data, traders look to the bond market for direction. Yesterday, yields on the10-year Treasury fell by almost 2% and stocks staged a solid rally. Trying to guess day-to-day moves in the bond market is pure folly, and thus trying to guess the stock market’s next move is equally foolhardy. Friday’s employment report could be market moving.

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