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