My first job out of business school was at Intel, where we made the microprocessors for the IBM PCs and their “clones.” Meanwhile, Apple bought chips from Motorola for their computers. There is a funny story behind that one (actually several stories), but in any case, we were the Microsoft/IBM people, and Apple was, if not the enemy, certainly alien, different, almost incestuous and closed — a strange little cult.
Fast forward: these days, Apple is the world’s most valuable company, after barely surviving the ‘90s. And they have been a veritable fount of innovation, and as Steve Jobs (love him or hate him) always said, they changed the world. This former Intel guy (i.e., me), who lived his life in the DOS/Windows world until fairly recently, got hooked by the iPhone, the gateway drug that led to the iPad and ultimately to a MacBook! I am typing this letter on my new MacBook Pro, with my iPhone X right beside me, and I am a happy camper.
So what the heck is happening with the markets???
Well, I have to admit I am a happier camper when the markets do well. After a stellar 2017, one of the best years in a long time (as described so well by my colleague, Rafia Hasan, just two weeks ago), we had the best opening two weeks in a long time, and then we have today. And we have Apple.
It seems like yesterday, but it was two years ago — as 2016 started with two horrible weeks in equities — that I felt compelled to write two Saturday letters to talk about why panic was not the best way to react to this stress. Ultimately, things turned around, but that was painful.
Now we are seeing the opposite: markets have had two great weeks, and today the Dow blew through the 26,000 level.
I heard interest rates are going up — should we sell the bonds?!
Funny when you think about it. Equities are at all-time highs, so let’s…sell the bonds! What could go wrong?
Yes, it’s true — long-term interest rates have gone up and there was a brief moment of angst, but really, where can long-term interest rates go? Without serious inflation and wage increases, what would drive those rates substantially higher?
And if bond rates return to more normal levels — in the 3-4% range, for example — will that destroy the value of my bond portfolio?
The answer is that bond rates are unlikely to spike sharply and rapidly higher, so as to cause substantial losses in bond funds and portfolios. It could happen, but it does not seem likely. And if it happens, it seems most likely to happen in a bull market for equities, driven by a strong economy.
Remember, the bottom line is that these things are impossible to predict, and diversification helps protects you from a variety of scenarios. We sell off equity as it rises and buy bonds, so if equity crashes you have the old “anchor to windward.” And if equities keep rising and you lose a little bit in bonds, you are in good shape, are you not? We think sticking to the fundamentals is the best approach. And remember, if rates go higher, you will start earning more income from your bonds.
So what about Apple?
Today after the close, Apple made a series of huge announcements. In a recent article, we discussed the new tax bill and noted that we would have to wait and see what the results were. Well, today we learned a lot.
Apple announced that as a result of the new tax law, they would:
- Bring massive amounts of cash back from overseas ($250 billion?)1
- Make a $350 billion contribution to the U.S. economy over the next five years2
- Establish a new campus in the U.S.3
- Add 20,000 new jobs in the U.S.4
- Pay $38 billion in taxes5
- And more!
Wow! Wow. Speechless.