February 19th, 2020
Chadd Mason, CEO The Cabana Group
Apple Reports Coronavirus Threat to Tech
Earnings have continued to drive equity prices higher throughout the first half of February. This has occurred in the face of a variety of external threats, including ongoing domestic political upheaval and a worldwide coronavirus epidemic.
As always, it is earnings that drive prices. The rest is just noise until the noise begins to impact earnings. I wrote on this topic several weeks ago and stated that the coronavirus won’t matter… until it matters. We just got the first evidence that it is starting to matter in a report by Apple that came out Monday. Apple has indicated that the quarantine in China will cause it to miss its first quarter revenue expectations. The lockdown in China has resulted in disruptions to both supply and demand for phones. Apple, as well as other behemoths like Amazon and Google, have played an increasingly important part of this bull market. Apple was down almost 3% on the news yesterday. Amazon and Google have barely budged, which indicates that investors are considering Apple’s problem to be isolated for now. The point here, is that all investors who sold on the initial coronavirus news have lost out on significant gains over the past few weeks (the S&P 500 is up more than 2% in February), and we are just now seeing the first signs that the coronavirus might actually impact equity markets. Once again, it doesn’t matter until it matters. We will continue to watch as this situation unfolds.
Earlier this month, we touched on bond yields. Specifically, the yield curve and its implications on future economic growth (more information on the yield curve can be found here.) The bond market has a strong tendency to forecast economic conditions before the equity market. Bond yields have continued to drop across the curve (short, medium and long term), with longer-term rates dropping more on a relative basis than short-term rates. This condition can and has resulted in an inversion whereby shorter-term bonds pay more interest than longer term rates. In general, this type of yield curve represents economic weakness in the future. With stock prices rising and bond yields dropping, we have what is called a negative divergence in market technician terms. In an increasing earnings environment, we would expect to see longer-term yields rising to reflect future growth and the inflation that will inevitably follow.
The Federal Reserve indicated last week that it was going to stay put for the foreseeable future, so it will be up to the market and investors worldwide to resolve the current dichotomy. In my opinion, something must give. Either earnings will grow, and yields will rise, or yields will continue to drop, and earnings will fall. How this gets resolved is anyone’s guess, but the answer will determine when this bull market ends.
At Cabana we remain Moderately Bullish.
This mateIARl is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this mateIARl are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.
This mateIARl may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this mateIARl is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.
Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.
The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. IARs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.
The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. IARs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period. Visit www.fa-mag.com for more information regarding the ranking.
Cabana claims compliance with the Global Investment Performance Standards (GIPS®). In addition to the firm’s third-party verification, six of Cabana’s core portfolios have been performance examined consistent with GIPS® standards. The Global Investment Performance Standards are a trademark of the CFA Institute. The CFA Institute has not been involved in the preparation or review of this report/advertisement.
No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. Cabana manages assets on multiple custodial platforms. Performance results for specific investors may vary based upon differences in associated costs and asset availability.