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As Apple Goes, So Goes the Market?

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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With the stock markets down almost (OMG!) 5 percent from their all-time highs, lots of folks are looking for signs that the bull is dying, if not dead. One of the more portentous omens is the recent decline and volatility of Apple's stock. 

Or so it seems. 

For reasons too numerous to list here, Apple captures an enormous amount of mindshare. I find that gratifying, as a fanboy since falling in love with a Mac Classic in 1988. I have jokingly noted that the five major asset classes are stocks, bonds, real estate, commodities and Apple. However, too many people seem to think it is the most important stock in the universe. Even if that were true, that doesn't help us understand how markets work. 

Of course, Apple is important. It had annual sales of $183 billion in the fiscal year that ended last September, almost 100,000 employees, some of the most successful retail stores ever and more than $200 billion in cash and liquid investments. It also is the world's largest music retailer, reaps almost all of the profits in the mobile phone market and, of course, has a fanatical level of brand loyalty. 

Apple's influence is largely a function of its outsized weighting in various indexes. It is the largest component in the Standard & Poor's 500 Index at about 3.62 percent. In the Nasdaq 100 Stock Index, it's even more influential at 12.85 percent -- that's not quite double Microsoft's weighting, the next biggest component, and almost three times the size of Amazon, at 4.76 percent. Apple ranks seventh in terms of influence in the Dow Jones Industrial Average, which uses a price weighting, meaning that companies with higher absolute share prices (but lower valuations), such as Goldman Sachs and IBM, have a greater impact. 

But does this mean that Apple serves as a meaningful market indicator? The short answer is probably not; the longer answer is a bit more interesting. 

Apple has captured attention due in part to its record of creating new markets or overturning those of so many different industries. It has left a trail of creative destruction that has mangled companies as varied as Motorola, Hewlett-Packard, Dell, Research in Motion (BlackBerry), Nokia, Ericsson, Microsoft, Sony and Intel. It has challenged companies such as Google (a juggernaut itself) and voice and data carriers such as AT&T and Verizon. Qualcomm, Corning, Foxconn, Samsung and Sharp are all beneficiaries of Apple's success.

Maybe providing some historical perspective would help. Consider the stock's volatility. Back in the 1990s, there were weeks when Apple's value was almost cut in half, including one week when it declined 51 percent. In other periods, the performance was just as dismal; Apple's worst monthly and quarterly performance didn't include that one awful week. 

The recent decline of 12 percent, ostensibly on disappointing demand for Apple Watch, has lopped off more than $100 billion in market value from Apple's shares. Apple's stock price is at an eight-month low, and is below its 200-day moving average for the first time since September 2013. 

Volatility has also been an enduring feature of Apple's shares during the past decade as it rose to become the world's most valuable company. Since 2005, Apple has lost 25 percent of its value on at least six occasions. After it rose to all-time highs in September 2012, it declined by almost half, losing 44 percent by the following April. During the same period, the S&P 500 gained more than 11 percent. Apple's stumble didn't seem to have much of an impact on the broader indexes. 

Michael Batnick, the head of research in my firm, observes that "this sort of price action is something that Apple shareholders have grown very accustomed to during the past few years." In fact, during the past 20 quarters, Apple has been in the midst of a 10 percent decline 38 percent of the time. And yet during the past two years, Apple has gained more than 60 percent, handily outperforming the S&P 500. 

I have no idea if this recent slide is just Apple's ordinary, periodic volatility, or something more serious. Apple and the indexes often seem to go their own separate ways, even though Apple's sheer size means that its ups and downs can help or hurt the major indexes. But it doesn't seem to foretell the direction of the market. At least, it hasn't done so in the past, and you know just how much of an indicator past performance can be. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net