The big news on May 4th was the Federal Reserve’s announcement of a 50bp hike in US short-term interest rates. It was the biggest rise in two decades, and it comes on the heels of rampant inflation.
Immediately before the announcement, apple stock (AAPL) – Get the Apple Inc. report. It traded up to 2% higher. Stocks lost ground in the middle of the afternoon, and so did the rest of the stock markets. But a late session rally pushed AAPL to $166 a piece and out of correction territory.
At the end of the day, is the 50 basis point increase in the federal funds rate good or bad for Apple stock? We explore this question in more detail below.
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The Fed is more pessimistic than expected
Perhaps it is useful to understand why stocks reacted positively to the Fed’s monetary policy announcement.
A 50 basis point rise in prices was a huge market consensus. That’s why the S&P 500 bounced only a bit when the press release came out, around 2pm ET – but the index didn’t initially rise or crash.
The pivotal moment came about 45 minutes later, when Chairman Jerome Powell asked questions following his prepared remarks. In my view, the Chief Banker sounded more pessimistic than many had anticipated at the start of the day.
First, Mr. Powell suggested that further increases of 50 basis points were still on the table, but he did not hint that sharper increases would last longer. Also, when asked if the probability of a bump is 75 basis points, Jerome emphasized that the Fed had not considered it seriously.
The Fed chief also mentioned early signs of moderating inflation. For now, Powell appears confident that rising consumer prices can be combated without significant central bank intervention – something that could, for example, lead to a looming recession.
How price hikes affect AAPL
There are two ways to look at the impact of interest rates on Apple, its business, and AAPL stocks: from a fundamentals perspective and from a market point of view.
Basically, the higher prices are bad news for Apple. This is the case because a rise (1) discourages consumers from buying more products and services, and to a lesser degree (2) it increases Apple’s borrowing cost. The company currently has $120 billion in debt.
The first point above is especially important if strong monetary tightening leads to a sharp economic slowdown. Apple may suffer from lower units sold and lower average prices, while supply chain challenges won’t necessarily alleviate much.
However, keep in mind that long-term interest rates have actually gone up strongly over the past few months – that is, a lot of potential “damage” has already been done. The Fed’s May 4 decision only formalizes the move higher at the short end of the yield curve.
From a market perspective, the recent increase in the Fed funds rate is likely to be neutral. This is true because the market fully anticipated the upward movement. If anything, comments about what the Fed will do next have been somewhat positive news.
Ultimately, Apple investors shouldn’t be too distracted by the headlines. The Fed’s announcement likely priced in AAPL shares prior to May 4.
It wouldn’t be “right” to say that a 50 basis point rise is good for Apple. But the Fed’s optimism about containing inflation is certainly positive. It’s hard to predict the future, but a rally in Apple shares from here wouldn’t surprise me much.
Short-term interest rates in the US rose, largely in line with expectations. In terms of Apple stock, what are the main takeaways from this month’s ‘Fed Reserve Day’?
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