Is Apple Stock A Bubble? What History Has To Say

Daniel Martins

Until very recently, Apple stock had been on a run rarely before seen. The trailing twelve-month return as of September 1 had surpassed 160% for the first time since 2010. On the same day, the Dow Jones Industrial Average, a broad sector index of 30 US stocks, had achieved returns of less than 10% in the previous year.

Such astonishing outperformance begs the question: is Apple a “bubble stock”? After all, shares went from $96 apiece (split adjusted) as recently as July 30 to $134 barely a month later. To try and answer the question, I ran a quick historical analysis.

Cycles in Apple vs. Dow

The exercise is the following: as far back as I could find reliable daily data, i.e. early 1985, I calculated the difference between Apple’s and the Dow’s trailing twelve month returns for each trading day. I then plotted a chart to see how often Apple has outperformed the Dow by a very wide margin, and what happened after each peak.

Check out the graph below. Notice that, visually, Apple’s performance relative to the Dow appears cyclical. In other words, Apple tends to outperform the benchmark, but not by a very wide margin for very long. Spikes in outperformance tend to be followed by a return to some sort of normal.

Over the past 35 years, Apple’s twelve-month returns topped the Dow’s by a long-term median of 19 percentage points, which is impressive. However, it did so by more than 150 percentage points only a few times. Let’s review each of them, and see what happened in the following 24 months:

  • October 1987: Apple was ahead of the Dow by nearly 200 percentage points moments before Black Monday. In the following 24 months, Apple produced an average annual loss of 11%, while the Dow managed to recover to mid-October levels.
  • December 1998: Apple once again beat the Dow by around 200 percentage points as the dot-com bubble continued to inflate. In the following 24 months, Apple produced an average annual loss of 15%.
  • March 2000: at the peak of the tech bonanza, Apple pulled away from the Dow the most in history – over 300 percentage points in the trailing twelve months. The following 24 months were disastrous, as Apple gave up an annual average of 43% in market value until March 2002.
  • February 2005: this was the only time that Apple’s peak outperformance over the Dow was not followed by a significant correction in the stock price. The introduction of the iPhone in 2007 probably helped to keep shares afloat.

Apple pulls away from the Dow

In 2020, Apple stepped hard on the gas pedal. At one point, only about ten days ago, Apple had been beating the Dow over the trailing twelve months by more than 150 percentage points. Since then, Apple has corrected, flirted with bear territory, and the outperformance against the benchmark has narrowed substantially.

If I had to take a guess, I think the chances were high that Apple stock was a bubble until as recently as the start of September. It is unclear to me, however, if the 16% in market value that shares had lost between September 2 and the end of last week were enough to return the stock to reasonable valuations.

In any case, I maintain my views on Apple: bullish in the long run, but cautious about being overexposed at current levels.

Read more from the Apple Maven:

Previewing Apple’s Week: Will There Be An iPhone 12?

Apple Stock: What Analysts Have To Say This Week (Video)

Apple’s September Event: Not What Investors Expected (Video)

(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)

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