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So Apple beat its earnings forecasts, and as I write this on Wednesday it’s en route to becoming the world’s first publicly traded $1 trillion company or darn close.
So why, in the face of that mind-bending feat, am I looking back to Tuesday’s news that Morgan Stanley strategist Michael Wilson thinks the market may drop 10%, with technology growth stocks like Facebook FB, -0.08% , Apple AAPL, +5.32% and the rest of the FAANG companies taking the hardest hit?
Well, to make the point anew that market timing is basically for suckers and those with an exalted sense of their guessing skills. And to debate whether Wilson’s take on today’s market is wrong, irrelevant or maybe even both.
Apple’s news wasn’t all that unexpected: The company reported net income of $11.5 billion, or $2.34 a share, up from $8.7 billion, or $1.67 a share, a year earlier. Analysts had projected profit of $10.8 billion, or $2.16 a share, according to FactSet. Higher-priced iPhones and Apple services grew faster than expected, boosting profit margins.
“This is the report that’s going to propel the stock to a trillion dollars plus,’’ veteran Apple analyst Gene Munster said on CNBC television. “This story could double or triple based on what we’ve seen.’’
At the same time, Wilson’s case is that the market is ready to play a more defensive game as it grinds toward the biggest correction since February — which, you’ll recall, is not that long a time.
To bolster this, he argues that growth stocks are overpriced after a long period of outperformance dominated, of late, by the FAANG stocks: Facebook FB, -0.08% , Apple AAPL, +5.32% , Amazon.com AMZN, +0.86% , NFLX, +0.73% and Google.com parent Alphabet GOOG, +0.31% . The gap in valuation and recent performance between the Russell 1000 growth RLG, +0.23% and the Russell 1000 value indices RLV, -0.50% has only been greater once, he says — right before the long tech crash beginning in March 2000.
“We think a coming correction will be biggest since February, although it could very well have more of a negative impact on the average portfolio if it is centered on tech, discretionary, and small caps,” Wilson wrote.
There are really two answers to this, or three if you account for the chance that he is right as far as his team’s analysis goes.
One is, he’s wrong. The other is, he’s asking the wrong question.
First of all, valuations hardly point to Web Bubble 2.0. The S&P Information Technology Index SP500-45TR, +0.77% — the 80-odd tech companies in the S&P 500 SPX, -0.09% , including all five FAANG stocks and Microsoft MSFT, +0.11% — trades at about 17.5 times expected earnings for this year, according to CFRA Research, compared with 15.9 times for the S&P 500 as a whole. That’s about a 10% premium — not much if you think the underlying businesses are growing faster than the economy.
And they are.
By CFRA’s numbers, tech’s premium over other stocks was actually wider than today after the tech bust — tech’s price-to-earnings ratio was double the market’s in late 2002.
Today’s market doesn’t look like 2011, when tech and everything else were at parity (no wonder tech has outperformed since, by a lot) but the 10% premium now is close to the spread between the two indices in late 1995 or early 1996.
As you might recall, that turned out pretty well.
But the better objection to Wilson’s report is that it asks the wrong question for retail investors. A giant firm like Morgan Stanley focuses on institutions that live and die by quarterly and yearly performance.
But Apple’s beat, like Facebook’s earnings miss last week that shaved 20% off its shares, highlights the impossibility of predicting incremental news accurately enough to dart in and out of the market.
Indeed, CFRA strategist Sam Stovall says, if an investor were out of the market for only the 10 best days of the last 30 years, their returns would have been 30% lower. If they happened to be on the sidelines for the 20 best days, their returns would have been cut in half.
Half.
| Period of investment | Compound annual price return of S&P 500 |
| Stayed fully invested | 8.3% |
| Missed the 10 best days | 5.8% |
| Missed the 20 best days | 4.1% |
| Missed the 30 best days | 2.7% |
| Missed the 40 best days | 1.4% |
| Source: CFRA, S&P Global Data: 1987-2017 | |
To miss all that money, you had to be on the sidelines on days like Oct. 13, 2008, in the middle of the financial crisis, when stocks rose 11.6%. No one expected that. Or March 23, 2009, two weeks after the Wall Street Journal’s infamous “Obama’s Radicalism is Killing the Dow” headline, when stocks climbed 7.1% for the third-best daily gain ever.
Heck, if the Journal’s editorial page and former George H.W. Bush economic adviser Michael Boskin (author of the op-ed in question) couldn’t get the market timing right, what chance you got?
Second, let’s recall that changes wrought by internet computing are not close to being over. T. Rowe Price Science & Technology Fund PRSCX, +0.24% manager Ken Allen made that point in his second-quarter shareholder letter.
Allen tells you the FAANG stocks will be fine because their businesses will be fine. Stovall reminds you that you can’t outguess the market on short-term swings anyway.
Therese Poletti: Apple earnings show why you can expect more $1,000 iPhones
So if you’re a Mom & Pop retirement investor, sit tight and let all that transformation happen. Because you know from everyday life it’s happening apace. Apple’s flirtation with a big, giant number today should only serve to remind you.