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By: Tim Fortier — January 5, 2022

Apple's Market Cap Recently Hit $3 Trillion. Does it Really Matter?

Dear Reader,

2021 was a year for the ages with investors exuberance displayed for "NFTs", "SPACS", meme stocks like GME and AMC, electric vehicles (EVs) to name just a few of the recent manias.

And of course, the other massive trend of 2021 was inflation which has proved to be anything but "transitory" despite that talking heads trying to convince us otherwise for most of last year.

So where does this put us here as we begin the New Year?

The year began with Apple trading at an intraday high of $182.88 on Monday, making it the first company to hit a $3 Trillion dollar stock valuation.

The world's most valuable company reached the milestone as investors bet that consumers will continue to shell out top dollar for iPhones, MacBooks, and services such as Apple TV and Apple Music.

Should investors care?

Apple hitting $3T in market capitalization is as much the story of how investors have poured money into a handful of huge and profitable names to achieve "relative safety".

For most of last year, and as I have discussed several times, the stock market is being led by 5-6 names.

You can see this easily in the following chart that compares the cap-weighted Nasdaq to the equal weight.

Remember, for the Nasdaq, AAPL, AMZN, GOOGL, FB, and TSLA are 40% of the Nasdaq by weight. That's a lot!

Another thing about 2021 was that the S&P 500 performed better than the Nasdaq Composite, which rarely happens.

This again is because of the influence of a handful of mega-caps while most stocks have been languishing.

A study by Goldman Sachs shows that since April of last year, this handful of names has accounted for most of the market's performance.

Last week I showed how the advance-decline line has been steadily dropping since last April.

Here too is another bit of evidence that shows us the "true" health of the market.

The 200-day moving average is perhaps the most-watched moving average of all.  When a stock falls under this average, it is considered very negative for that stock.

As this chart shows, the number of stocks above their 200-day moving average has been steadily falling.

This too has been happening beneath the surface. While many are watching the success of a few mega-caps, this is really the state of the market.

Apple hitting $3T is really just a distraction to the real story of this market.

Inflation and the Fed.

The Fed had no choice but to acquiesce to inflation as persistent price increases for goods and services across the economy are accelerating.

This brings us to rates. Forget the chart of AAPL. The real chart every investor should be focused on is interest rates.

This chart of the 10 Year Treasury rate shows that interest rates have been steadily climbing.

Rising rates are not what a fragile stock market needs.

The following chart shows the rate-sensitive Nasdaq compared to the recent move in interest rates. (Note that the interest rate chart is inverted.)

And with today's FOMC meeting minutes showing a more hawkish than expected Fed, hiking interest rates faster than expected, this is likely to cause some issues for the market.

Especially for a market that has been priced to perfection.

Chris Rowe, earlier this week, pointed out the elevated P/E ratio for the market.

The Buffet Indicator, which compares the value of the overall market to the GDP of the U.S. economy shows the most overvalued market of all time.

The problem is this...

To support stocks priced for perfection, you need increasing cash flows and earnings. But examing the expected sales forecast for some of the markets largest companies, we can see the sales are expected to come in less, not more.

So, to every investor who has been piling into Apple, I ask you to consider a piece of market history.

Back in the 1960's and 1970's stocks like Coke, Kodak, Polaroid, and Xerox were revered for the same reasons investors love buying today's FAANGS.

Back then they were called the Nifty 50.  Today we have the Nifty 5.

As investors learned back then, valuations do actually matter.

And I believe that today, another generation of investors is about to learn that same lesson.

Tim Fortier, Editor