Apple Boosted Friday's Markets
Slight Final Decline In Consumer Sentiment
The University of Michigan consumer sentiment index for July fell slightly in the final reading as compared to the preliminary reading. It fell from 73.2 to 72.5. The data looks much worse when compared to June, as it’s down from 78.1 as shown in the chart below. This was a moderately good reading.
It tells us COVID-19 was more of a negative catalyst than the potential loss of unemployment benefits. That’s because the spike in cases happened in the second half of June, while the worries about benefits started near the middle of July. Most of the decline in sentiment occurred in the first half of July.
It’s possible the worries about benefits won’t kick in until after people stop getting unemployment benefits this week. However, most everyone knew the benefits were going to temporarily expire. People will be getting unemployment support and checks within the next two weeks. On Friday, July 31, the White House stated it is willing to make a deal with the Democrats that leaves out protection for businesses, schools, and hospitals from coronavirus-related lawsuits.
Everyone wants a deal; it’s just a matter of finalizing an agreement. Remember, it was always highly likely to take until early August to get something done. Next week, the negotiations will likely impact the market again as it is crunch time. Small cap cyclicals have the most to lose if something doesn’t get done. The fact that nothing was done may have been behind the decline on Friday.
The current conditions index was down from 87.1 to 82.8. This is much worse than the Conference Board index, which was up. Just like the Conference Board index, the expectations index fell sharply from 72.3 to 65.9. This tied the six year low, which was set in May. Expectations will likely turn around in the August report because COVID-19 cases have been falling.
PCE Spending & Inflation Watch
We got the June PCE report on Friday, which is obviously outdated by now. It’s no surprise spending was strong and income fell slightly because of fewer benefits. Income fell 1.1% as transfers fell and compensation rose. That’s a good trade off, as we’d rather more people get paid by working than by the government.
Disposable income was down 1.4%, but it’s still above the pre-COVID-19 level. That’s because of the stimulus. Consumer spending growth was 5.6% and real spending growth was 5.2%. We can expect these results to worsen in July and then get better in August. Savings rate was an enormous 19%. There was still cash to satisfy pent up demand in June.
PCE inflation rose from 0.5% to 0.8%, which is still anemic. Core PCE inflation actually fell from 1% to 0.9%. Remember, the Fed is unlikely to raise rates until core PCE gets to 2.1%. We are many months away from that happening.
Easy comps in 2021 might boost inflation, but they won’t come close to causing the Fed to hike rates. We might need to wait for 2022 for the Fed to even guide for rate hikes in the intermediate term (next year or two).
Apple Stock Explodes Higher
Apple (AAPL) stock was up 10.47%, which is an enormous amount for the largest company in America. It’s market cap grew to $1.84 trillion, which made it the largest company in the world, surpassing Saudi Aramco.
It added $175 billion on Friday, which is the most for a company ever. Apple reported $2.58 in EPS, which beat estimates for $2.04. It reported $59.69 billion in sales, which beat estimates for $52.25 billion. iPhone sales were $26.42 billion, which beat estimates for $22.37 billion.
Finally, it reported $13.16 billion in services sales, which missed estimates by $20 million. Keep in mind, even though the numbers dramatically beat estimates, they weren’t strong on an absolute basis. Sales growth was 11%. Apple is getting hugely rewarded for being stable in a bad environment. If the environment continues, Apple should do fine. If there is a cyclical recovery, you may wonder if Apple stock can do well. Many investors value stocks with quicker growth.
In other words, they are cheaper and grow faster. As you can see from the chart below, sales growth has been weak even though Apple has the highest price to sales ratio in its history. Apple stock has been fueled by buybacks in the past few years. This year it’s outright bubble-level speculation.
Services business had 14.85% sales growth. Its long term goal of $50 billion in annual sales was reached. Services sales doubled from 2016, which occurred six months ahead of schedule.
Apple is becoming a services stock, which is why it is getting a higher multiple. iPhone sales were only up 1.66%, which is subpar. If this was in 2017, the stock would have crashed on such low growth. Apple won’t be an iPhone company in five years if everything goes according to plan.
iPad sales were $6.58 billion, which beat estimates for $4.88 billion. That’s 31% growth. This product line is perfect for working from home. Similarly, Mac sales were $7.08 billion, which beat estimates for $6.06 billion. This burst in sales will come back down to earth next quarter.
Once you purchase a new iPad or Mac to work from home, you don’t need another one three months later. Other products had $6.45 billion in sales which beat estimates for $6 billion. That’s 16.74% growth, as Apple Watch and AirPods did better than expected. Gross margins were 38%, which met estimates.
75% of Apple’s stores were open around the world. We can expect all of them to be open within the next few weeks as this second wave of COVID-19 cools off. The iPhone SE, which costs $399, took shares from Android.
This is a hugely important product for Apple because now that it sells more services, each market share point matters more. Apple used to focus on profits over market share because its profits were mainly in hardware. That’s quickly changing.
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