Apple Drags Market Lower

Major US stock indexes fell at the open (Dow -310 pts; SPX -1.6%; Nasdaq -2.5%), reversing yesterday’s gain. Energy is the only sector in rally mode as oil surged past $118/barrel (see below). The bond market is selling off after the government’s monthly jobs report (sell below). Today’s trading session is a microcosmic tug-o-war between economic growth expectations and fear of inflation.

You may recall that OPEC agreed to increase oil production over the summer. It might not be enough to satiate demand. The European Union (EU) just passed another measure imposing sanctions on Russia, including a phased embargo on Russian oil. The Wall Street Journal says that by the end of the year about 90% of Russian oil exports to the EU will be banned.

Economists and investment strategists are at this moment strenuously parsing the monthly Employment Situation Report for clues on the health of the labor market and wage inflation. Non-farm payrolls rose 390,000 in May vs. about 320,000 expected. But while better than expected, the tally slowed a bit from prior months. The unemployment rate held steady at 3.6% and the under-employment rate ticked up to 7.1%. Wages have been rising at a better than 5% annual pace since the beginning of the year. The most encouraging bit was that 30,000 people re-entered the workforce, pushing the labor force participation rate up to 62.3%. Participation sank due to the pandemic but has gradually improved this year. Continuation of this trend is essential in a market starved for workers. We need to see supply & demand for labor come back into line. The labor market remains strong and wages are rising, which seems encouraging. But that might mean the Federal Reserve will have to raise interest rates all the more to get inflation under control.

Apple (AAPL) fell over 4% in early trading after an analyst at Morgan Stanley said App Store sales are slowing and this could hurt second quarter sales and disappoint investors. To be clear, this is a near-term trading call. “While we are bullish on the longer-term App Store and Services outlook, a deceleration in…growth could be a near-term headwind to results.” The analyst characterized Apple as “more resilient at all stages of the economic cycle” than its competitors. I’d point out that prior to today the stock was down only about 15% on the year—far less than many other tech stocks—and isn’t all that cheap.