Global markets shuddered Thursday after Apple said China is buying fewer iPhones, amplifying fears that the world’s second-biggest economy is fading.
Apple chief executive Tim Cook pointed to the unforeseen “magnitude of the economic deterioration” in China, the world’s largest smartphone market.
Apple shares sank 10 percent, and the Dow Jones industrial average dropped 660 points, or 2.8 percent, to close at 22,686.
The Standard & Poor’s 500-stock index slumped 2.5 percent, and the technology-heavy Nasdaq composite fell 3 percent. The Nasdaq dipped into bear territory, which is at least 20 percent below its most recent peak.
Stocks steered lower after a disappointing manufacturing report from the Institute for Supply Management — with the largest one-month drop since 2008.
Nine of 11 S&P 500 sectors were in the red, with technology leading the way down. Real estate and utilities hung on to positive territory.
Apple was the biggest drag on the Dow — 29 of 30 components were down. Microsoft, Intel and Cisco were all hit hard on their exposure to China. Boeing, Caterpillar and United Technology were down. Only Verizon ended in positive territory.
Asian and European markets were reeling from the Apple announcement, down across the board. The German Dax and the benchmark index in France both traded more than 1.5 percent lower.
Kevin Hassett, chairman of the White House Council of Economic Advisers, said there is more pain in store until the United States and China resolve their trade differences.
“It’s not going to be just Apple,” Hassett said in an interview on CNN. “There are a heck of a lot of U.S. companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China.”
China’s weakening economy gives President Trump the upper hand in trade negotiations and “puts a lot of pressure on China to make a deal,” Hassett said.
“If we have a successful negotiation with China, then Apple’s sales and everybody else’s sales will recover,” he said.
Gold hit a six-month high, signaling that investors were heading to safe havens in anticipation of difficult times ahead. Oil prices were rallying on indications that Saudi Arabia is making good on production cuts promised last month.
The 10-year treasury yield has fallen to 2.55 percent, down from 3.24 percent less than two months ago, another sign that investors are piling into safe assets.
“This is certainly a confirmation of a slowdown in global growth,” said Sam Stovall, chief investment strategist for CFRA. “But it does not answer the question whether it will lead to a global recession.”
Investors said Apple’s disappointing news puts more pressure on corporate earnings, which begin reporting this month.
“While all eyes are focused on Apple and the implications for growth, we should probably get a more valid check in the next couple weeks when earnings season gets underway,” said Wayne Wicker, chief investment officer at Vantagepoint Investment Advisers.
The U.S. economy remains strong, with unemployment at a nearly 50-year low. Interest rates are low by historical standards, even after nine Federal Reserve interest rate increases since December 2015.
Retailers reported a robust holiday season, and corporate earnings are expected to be healthy when companies begin reporting this month.
Corporate earnings are forecast to be 14 percent above the corresponding period in the previous year when the reporting season begins later this month.
Apple’s warning comes on the heels of two key reports in recent days from China, indicating its manufacturing sector is slowing. Investors said the slowing Chinese economy puts even more pressure on China and President Trump to seal a deal with China and end the tariffs on Chinese goods before the downturn infects the United States.
“The [manufacturing] data puts a lot of pressure on the Chinese to make a deal with President Trump on trade,” said Ed Yardeni, president of Yardeni Research.
China is much more dependent on the U.S. market to buy its goods. Exports from the United States to China represent only 7.8 percent of total U.S. exports, Yardeni said.
Yardeni said the Chinese economy is suffering from insufficient domestic demand, which makes its $500 billion in exports to the United States critical to China’s economic health.
“The Chinese can’t really afford to have any weakness in their exports, given the weakness in their domestic economy and demand,” Yardeni said. “People are living longer and not having enough kids to support them with domestic growth. China is rapidly emerging as the world’s largest nursing home.”
Some worry that the U.S. president may take the wrong route.
“I think President Trump is going to say, ‘Now I’ve got them where I want them,’” Stovall said. “I worry that he will not give them an opportunity to save face.”
The news from Apple unleashed a shock wave. Just a few months ago, the tech giant was the first U.S. company to cross $1 trillion in market capitalization. It peaked in August at $1.1 trillion. As tech stocks suffered a brutal turn toward the end of last year, Apple has fallen out of the top three most valuable U.S. companies.
It was surpassed in the last quarter of 2018 by Microsoft as the most valuable company, with a market capitalization of $780 billion.
Yardeni expects brighter days ahead.
“My hunch is that the biggest problem for Apple is that everyone has a smartphone. The market is saturated,” he said. “That will all change once 5G replaces 4G, stimulating a huge upgrade wave starting later this year into 2020.”
Some money managers said investors and computers are reacting to every wisp of news as the 10-year bull market reaches old age.
“Suddenly, investors are interpreting every detail as a ‘sign’ we are on the verge of recession in a sustained bear market,” said Nancy Tengler, chief investment strategist at Butcher Joseph Asset Management. “I don’t see the evidence. Yes, the economy is slowing — thanks to the trade situation with China. Yes, the market has gotten skittish, thanks to the Fed and the machines. For long-term investors, this is an opportunity to buy high-quality companies at a discount.”
Gerry Shih in Beijing and Damian Paletta in Washington contributed to this report.