Interest rate rises 0.5%: why is this good for Apple stocks?
The big news of the day on May 4 was the announcement by the Federal Reserve of a 50 basis point hike in short-term interest rates in the United States. The rise was the largest in two decades, and it comes on the heels of runaway inflation.
Just before the announcement Apple Stock (AAPL) – Get the Apple Inc. traded up to 2%. Stocks lost steam in mid-afternoon trading, as did the rest of the equity market. But a late-session rally pushed AAPL to $166 apiece and out of corrective territory.
In the end, is the 50 basis point increase in the federal funds rate good or bad news for Apple stock? We explore this question in more detail below.
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The Fed is more dovish than expected
This probably helps explain why stocks reacted so positively to the Federal Reserve’s monetary policy announcement.
The 50 basis point rate hike was very much in line with market consensus. That’s why the S&P 500 rebounded only slightly when the press release came out, around 2 p.m. EST — but the index neither rebounded nor slumped at first.
The pivotal moment came about 45 minutes later, when Speaker Jerome Powell took questions after his prepared remarks. In my opinion, the Chief Banker seemed a little more dovish than many expected at the start of the day.
First, Mr. Powell suggested that two more 50bp hikes remain on the table, but he did not suggest that the more aggressive hikes would stick around any longer. Moreover, when asked if a 75 basis point hike was a possibility, Jerome assured that the Fed had not actively considered it.
The Fed Chairman also mentioned the first signs of moderating inflation. For now, Mr Powell seems confident that rising consumer prices can be tackled without substantial central bank intervention – which could, for example, trigger a recession on the horizon.
How Rate Hikes Affect AAPL
There are several ways to look at the impact of interest rates on Apple, its business, and AAPL stock: from a fundamental perspective and from a market sentiment perspective.
Basically, higher rates are bad news for Apple. This is because the rise (1) discourages consumers from buying more products and services and, to a lesser extent, (2) the cost of borrowing for Apple increases. The company currently has $120 billion in debt.
The first point above is particularly important if aggressive monetary tightening leads to a sharp economic deceleration. Apple could suffer from lower units sold and lower average prices, while supply chain challenges might not necessarily ease much.
That said, keep in mind that longer-term interest rates have already risen aggressively in recent months, i.e. much of the potential “damage” has already been done. The Fed’s decision of May 4 only formalizes the upward movement on the short end of the yield curve.
From a market perspective, the recent hike in the fed funds rate is likely neutral. This is true because the market had fully anticipated the upward move. On the contrary, comments on what the Fed will do next were mildly to moderately positive news.
The Key Takeaway
Ultimately, Apple investors shouldn’t be too distracted by headlines. The Fed’s announcement had likely been priced into AAPL stock long before May 4.
It wouldn’t be “fair” to say that the 50 basis point hike is good for Apple. But the Federal Reserve’s optimism about inflation control is certainly positive. It’s hard to predict the future, but a rally in Apple stocks from here wouldn’t surprise me much.
Short-term interest rates rose in the United States, very much in line with expectations. When it comes to Apple stocks, what’s your main takeaway from this month’s Fed Day?
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