American Porcupine. Photo: Chuck Holmer. Source: Wikimedia
That’s what we thought the other night when our dog came rushing back to the house from the nearby woods. She was acting a little strange, so we took a closer look. Sure enough, she had a mouth full of porcupine quills. What followed was about an hour of holding her still while one of us used a pliers to latch onto each quill and pull it out. Our dog was a good girl and was quite calm during the whole uncomfortable process.
And “Uh oh” is what I think each time a company announces that their earnings in 2019 will be lower than expected. The latest – and most prominent – such announcement was Apple. They expect that consumers will spend only $84 billion this quarter on iPhones, iMacs, iWatches, and other iStuff, about $6 billion less than previously expected, and a decline from a year ago. This knocked $75 billion off the company’s valuation, and it sent the market into a tailspin.
Apple shares. Source: Bloomberg
Apple is hardly alone in cutting forecasts. Federal Express, Delta Airlines, chip-makers, homebuilders, and a host of other companies and industries have shaved their revenue estimates for next year. In fact, almost half the companies in the S&P 500 have reduced their estimates, and some of these, like Apple, expect outright declines.
This isn’t good. Corporate earnings are a leading indicator of the economy. When revenues fall, companies have to tighten their belts. They don’t upgrade their systems and software, they can’t launch new products, and they won’t hire new workers. “Uh oh,” indeed.
Still, Apple is just one company, and this is just one quarter. Four years ago, the economy endured three quarters of declining earnings without falling into a recession. But that was when falling oil prices ripped through the energy, materials, and mining sectors. Lower oil prices were a boon to consumers. That was then, and this is now. Today, companies are paying more for resources due to trade barriers, China’s economy is slowing, populism is roiling Europe, the central banks are bent on “normalizing” the money markets, and there’s no relief in sight. This market’s decline has already outpaced anything seen since 2008.
When our pooch showed up with a face full of porcupine quills, she learned an important lesson: just because you want to play doesn’t mean everyone else wants to. Similarly, Apple’s revenue warning carries its own lesson: even great companies with great products at the center of a great economy can stumble.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”