Weekly Update

Interest Rates and Economic Uncertainty Keep a Lid on the Market

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Published September 16, 2022


Investors have their hands full these days trying to parse the conflicting economic reports. The labor market tells us that unemployment is at record low levels. Wages are rising for the first time in a very long time. Yet, fear is growing that the economy may be softening, while inflation remains higher than investors would like (fueled by those same rising wages). This week was a microcosm of the pitched battle between bulls and bears.

We will look at the market’s largest and perhaps most influential stock, Apple.

Here is commentary leading to one of the best days this stock has had – a +4% pop to begin the week. Two excerpts of news reports give us the impetus behind Apple’s stock surge.

From a summary on Motley Fool:

Apple investors have been flooded with reports of strong iPhone 14 presales, which have historically been a good indicator of continuing consumer demand for the device. Earlier this week, numerous analysts read the digital tea leaves and concluded that strong pre-order data suggests resilient demand for the iPhone, even in the face of macroeconomic headwinds.

Just yesterday, Evercore ISI analyst Amit Daryanani was the latest to jump on the bandwagon, suggesting that longer lead times pointed to robust demand for the latest version of Apple’s flagship device, according to The Fly. He was particularly bullish regarding strong user interest in the iPhone 14 Pro, Pro Max, and Plus, the higher-priced models.

From Bloomberg:

Apple Inc. shares rallied the most since May as pre-order data showed the iPhone 14 Pro Max was the best selling model, surpassing what the older version did in a similar timeframe.

Shares of the tech giant rose 3.9%, their biggest one-day gain since May 27, and the stock closed above is 200-day moving average for the first time since August. Analysts from JPMorgan to Barclays wrote that the data point to strong demand for the latest mobile phone series, which was unveiled at it product launch event last week.

“Pre-order data shows that the iPhone 14 Pro Max is the best-selling model, and that it is doing better than the iPhone 13 Pro Max did at this point,” KGI Securities analyst Christine Wang wrote in a report. The pricing of the iPhone 14 series is positive for its futures sales, she added.

And a chart showing the stock popping higher on big volume (arrow).

Apple popping higher on big volume

It looked like Apple, and the market broadly, might be ready to rally again. But wait, here’s analyst commentary directly refuting the story of strong sales of the new iPhone:

From Business Insider and influential Apple analyst Ming-Chi Kuo :

Kuo said stock of both the iPhone 14 and 14 Plus will be available in retail stores when they launch, “reflecting lackluster demand.” Both phones are showing signs of weaker pro-orders than the iPhone SE3 and iPhone 13 mini, according to Kuo’s analysis, and the delivery time for the iPhone 14 and 14 plus is shorter than the arrival estimates for the iPhone 13 and 13 mini.

And the resulting chart showing a massive reversal of fortune for the stock, and on even HIGHER volume than the pop.

Apple massive reversal

But was that really the market-moving story? It turns out that it wasn’t the whole story, at least. On the same day as these reports of weak iPhone pre-sales came the surprisingly strong report on inflation. That report sent short-term interest rates sharply higher as this chart of 2-year interest rates shows (report day change circled).

Strong report on inflation sent short-term interest rates sharply higher

The bottom line: Interest rates continue to be the dominant driver of the stock market, while economic uncertainty, reflected by the competing narratives on demand for new iPhone sales, keep a lid on any rally attempts.

Market Update

Stocks opened the week by extending their winning streak to a fourth consecutive session. Expectations that Tuesday’s inflation report will show moderating prices have underpinned the mini-rally over the four day span; a rally that has occurred despite continually rising interest rates. Monday saw the market move higher by +1%. Tuesday’s inflation report did indeed show an easing in prices. However, the slowdown in price hikes was not as much as hoped for leaving investors to recalibrate their outlook for future Fed actions. Stocks got hammered. The S&P 500 slid -4% while 10-year yields jumped +0.6% points to cross 3.4%. Wednesday offered a chance for investors to buy the dip; but the response was tepid. Stocks bounced back a slim +0.3% while oil stocks rallied strongly on a pop higher in oil prices. But the selling in stocks continued Thursday with jobless claims falling thus suggesting the labor market remains tight. Tight labor begets higher wages, thus inflation. Stocks fell another -1%. And again Friday, this time a -0.7% slip as FedEx spooked investors by withdrawing forward guidance in the face of economic uncertainty.

Investors were hit by further interest rate concerns this week quickly ending the market’s rebound effort. The S&P 500 slumped -4.78% while the more interest-rate sensitive Nasdaq 100 (QQQ) tumbled -5.79%. Smallcap stocks followed suit with a -4.49% slide.

Warm wishes and until next week.