Megacap Slump Is Testing Apple’s Safe-Haven Status

The Fed-induced selloff in technology stocks has traders dusting off their turmoil playbooks. Trouble is, one of the most popular strategies isn’t working: hiding out in Apple Inc.

(Bloomberg) — The Fed-induced selloff in technology stocks has traders dusting off their turmoil playbooks. Trouble is, one of the most popular strategies isn’t working: hiding out in Apple Inc.

Recent weeks have seen the stock fail to live up to its reputation as a haven. Concerns over China and recent growth trends — coupled with central bank policy that has contributed to the tech sector falling into a correction — has erased nearly $240 billion in value this month alone. Since the end of July, Apple is down 12%, compared with the Nasdaq 100 Index’s 5.8% decline. 

But while Apple isn’t immune from the economic backdrop and faces headwinds of its own, its slide hasn’t changed characteristics that have traditionally drawn investors  — including Warren Buffett — to it in times of uncertainty, including a rock-solid balance sheet and durable revenue streams. The stock is seen winning favor if a bleaker economic outlook leads investors to sour on more speculative plays.

“It has a lot going for it in this environment: it is gigantic, offers pretty predictable growth and cash flow in an uncertain world, and it is a very high-quality company that doesn’t have much debt,” said Jack Ablin, chief investment officer at Cresset Capital. “Its fundamentals are so solid that it is basically the Treasury of the equity market.”

Apple rose 1% on Friday.

Ablin said Apple could outperform if the market continues to struggle, just as it did during the collapse of Silicon Valley Bank earlier this year and when high inflation pushed the Federal Reserve to begin its tightening cycle last year, spurring widespread selling across tech. 

According to data compiled by CFRA, Apple has outperformed the S&P 500 Index in 64% of market corrections, with an average decline of 7%, less than half the 14.6% average drop of the benchmark index. The broader S&P 500 tech sector only surpasses in 30% of market corrections.

This time around, Apple’s weak momentum is one reason why the S&P 500 tech sector entered correction territory, and why Ned Davis Research lowered its view on big tech. 

The recent selloff gained steam after the Fed signaled that interest rates would remain higher for longer than some had anticipated. This more hawkish stance — which contributed to the yield on the 10-year Treasury spiking to its highest since October 2007 this week — has pressured multiples across tech and raised the prospect of a recession. 

Read: Apple’s iPhone 15 Goes on Sale in Test of Holiday Resurgence 

In such a scenario, investors should aim for resilience, according to Chris Haverland, a global equity strategist at the Wells Fargo Investment Institute. “We believe maintaining a quality bias in portfolios is appropriate given our view that an economic recession is likely in the coming quarters,” he wrote. Large-cap US stocks “lead all other equity classes in quality characteristics” like profitability, earnings stability, and balance-sheet strength.

Such factors apply to Apple, which screens as favorable relative to peers across a number of characteristics, including profitability, growth, revisions, leverage, and volatility, according to data compiled by Bloomberg. It is only unfavorable on two: value, and its valuation relative to history, although the stock’s recent drop has diminished that risk. It currently trades at about 26 times estimated earnings, near its lowest multiple since April, although above its long-term average.

“High-quality stocks tend to be more resilient in challenging periods, and Apple really embodies the quality theme, with its cash flow, buybacks, and balance sheet,” said Sam Stovall, chief investment strategist at CFRA.

In another sign of investor comfort with the stock, the CBOE Apple VIX, which tracks a market estimate of future volatility for the stock, is down 33% this year and is below its 10-year average. The CBOE NDX Volatility Index is down 22% this year.

Still, uncertainty with its key market of China and a less-robust growth outlook than peers like Microsoft Corp. or Nvidia Corp. have kept Wall Street from fully embracing Apple. Just 67% of the analysts tracked by Bloomberg recommend buying the stock, by far the lowest such ratio among megacap tech stocks.

“A lot of people hide out in Apple, on the idea that its cash flows are so reliable its safer,” said Dennis Dick, head trader at Triple D Trading Inc. “However, a lot of tech got very overbought, and if momentum breaks, then safety trades stop looking safe.”

Tech Chart of the Day

Recent market weakness has resulted in just 61% of Nasdaq 100 components trading above their 200-day moving average, as of the latest close. This is near the lowest ratio since March, and down from a recent peak of 84%.

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(Updates to market open.)

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