Apple Inc. suffered its worst week since last February and is down again on Monday. What can reverse this trend? If history is any guide, look out for the weaker dollar.
The tech giant hit a market capitalization of $3 trillion on January 3. Since then, the stock has fallen 13%, while mega-cap tech stocks in the S&P 500 are down 11%. Correlation is not new. Every time Apple's market cap has hit a trillion-dollar milestone, the broad market gauge has ushered in a technological correction. And the dollar's decline has been the key to reversing it.
When Apple first reached a market cap of $1 trillion in August 2018, it made a 20% technical improvement in the S&P 500. It happened again two years later, as it broke the $2 trillion milestone and then helped fuel the technological wreck of 2020. Obviously, other factors have played a role, such as Federal Reserve decisions and macroeconomic developments. But there's no fault in Apple's role as a stock-market bellwether.
Notable in each example is that the S&P turned when the dollar began to weaken -- and big tech led higher. Today's chart reflects that pattern in the technical corrections of the past three years. This happened in late 2018, setting up a rally for the beginning of 2019. This was again in 2020, when the dollar's peak in March coincided with the stock market's low.
The logic is not complicated. In times of crisis or global uncertainty, major US assets are considered a haven for international buyers. For stock market investors, this means big technology. But demand for a security can make assets overvalued, which is why the dollar's weakness serves as an important gauge for foreign investors. Tech has driven growth for much of the post-pandemic period, thanks to inflows from overseas. And in turn, this has led to the dollar and the U.S. dollar. An inverse correlation is created between equities.
The correlation between the Bloomberg Dollar Index and Apple stocks as a proxy for large tech stocks is a mere 0.2. This may not be statistically significant, but note that during the bottom of the last two corrections, the inverse correlation between the two assets was 0.18. The correlation is not as strong as it has usually been before the strengthening of the dollar - this time, Fed policy has been attributed to the hawkish. Therefore, the recent moves do not carry as much weight.
The point is to keep an eye on the dollar. As it weakens and provides more incentives to foreign investors, the S&P 500 sell-off is likely to reverse what has so far marked 2022. And history says big tech, including Apple, will play a key role in this.