On March 17, the Federal Reserve announced the decision to leave its short-term interest rate target unchanged, at near zero. At the same time, the Fed also revised its economic growth and inflation expectations higher.
Tuesday’s announcement should not have caught many by surprise. Yet, Chairman Jerome Powell’s remarks were perceived as bullish by the markets. The S&P 500 spiked about 40 points in mid-afternoon trading, before correcting a bit.
Apple’s stock also reacted positively to the day’s developments, rising from below $123 per share and erasing most of the day’s losses, which had reached -2.5% at one point. See chart below.
Now, the question that the Apple Maven addresses is: how does the Fed’s decision on monetary policy impacts Apple and its investors?
The impact to Apple’s business
Interest rates near zero can impact a company’s business in a couple of ways. For instance, Apple held nearly $200 billion in cash and equivalents on its balance sheet, as of the end of fiscal 2020. This pile of money earns minimal interest income today, given the low yields.
With interest rates staying close to zero for at least another year, Apple’s average $70 million in net interest income over the past three quarters (vs. $380 million in the previous three periods, when rates were higher) will probably remain low for a while longer.
But don’t forget the liability side of the equation. Lower rates lead to lower borrowing costs for Apple. Lower debt expenses mean cheaper access to more cash, should the Cupertino company need it.
Maybe more importantly, short-term rates are often used by companies as the risk-free benchmark to assess the value of their projects and investments. The lower the rate, the more incentivized Apple should be to put its cash to work: whether to build a plant, launch a product, or pay shareholders back.
The impact to Apple’s stock
Beyond the business fundamentals, and holding all other variables unchanged, zero interest should be bullish for stocks in general.
First, the present value of future cash flows (a traditional way of measuring a stock’s worth) is higher when rates are lower. Second, low rates mean little competition for investors’ assets, which more likely end up funneled into the stock market.
A low-rate environment is particularly bullish for growth stocks, as I believe to be the case of Apple. Worth noting, however: the Fed’s monetary policy decisions impact primarily short-term, not longer-term rates. If the 10- and 30-year yields continue to rise, as they have in the past few months (more so in 2021), the hike can be bad news for Apple shares.
I was curious to know what Apple investors thought of Tuesday’s Central Bank news, so I asked Twitter. Check out the poll below:
Read more from the Apple Maven:
(Disclaimers: this is not investment advice. 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)