Apple has been stuck in the mud for nearly a month. Although shares continue to make large day-to-day movements, the stock has not really gone anywhere. In fact, it ended each of the last three weeks trading just an inch above $121 apiece.
What could best explain recent price action? Should investors be concerned or encouraged about what comes next?
Too much of a good thing
Let’s not be too greedy. Apple had such an outstanding couple of years of performance, up more than 80% in 2019 and then again in 2020, that it would be unfair to be disappointed in the stock’s modest loss of 9% so far this year.
In fact, it may be because Apple was “too hot” entering 2021 that the stock now needs a breather. Since the Cupertino company went public, it has been rare for Apple shares to sustain a three-year gain for long, absent a historic moment – like the years of the iPod and iPhone revolution, the recovery from the Great Recession or the long-lasting internet bubble of the late 1990s. See chart below.
Apple stock’s 3-year rolling returns.
The idea that an overheated stock could be followed by weaker performance is consistent with some of my previous observations. As a recap: Apple tends to produce better returns when bought off a dip. Buying Apple on strength has historically led to below-average results.
It’s about the whole market
The other factor that may explain Apple’s lack of traction as of late is what many call the “cyclical trade”.
It is nearly a consensus that 2021 will be a year of recovery from the pandemic and sudden drop in economic activity. The US government has recently added fuel to the fire by approving a $1.9 trillion stimulus package that will put money in the pockets of consumers across the country.
In this kind of environment, especially now that economies will go from dormant to reopened very quickly, cyclical stocks should perform best. These are sectors that benefit from a pickup in economic activity and rising interest rates: think industrials, financial services, airlines.
To be clear, a strong economy is not necessarily bad for Apple. In fact, demand for tech devices could remain high as disposable income rises, even if the “stay at home economy” transitions to something that resembles the old normal.
But again, this is not about business fundamentals, but about market behavior. If investors were willing to bid up growth and defensive stocks in 2020, they are likely to shift their strategy and favor lower valuation, higher risk names this year.
iPhone skepticism
There is one company-specific factor that might be putting a damper on Apple stock. After the iPhone 12 showed strong signs of being a success in the most recent holiday season, news surfaced that Apple’s smartphone production could drop sharply from previously planned levels, primarily due to soft iPhone 12 mini sales.
I believe that the rally in Apple stock in 2019 and 2020 can be largely explained by expectations for a robust 5G upgrade cycle. Should the so-called “super cycle” disappoint, Apple’s stock price could very well deflate.
An Apple-specific reason for lack of traction in the stock is a plausible thesis, considering that Apple stock has underperformed most of its direct peers in 2021: Alphabet, Microsoft, Amazon and Facebook. See chart below.
Apple vs. FAAMG.
Twitter speaks
I asked our Twitter followers for their opinion: what best explains Apple’s lack of traction in the stock market in the past few weeks? Below are their answers.
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(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)
