NEW YORK (Real Money) -- Since the ominous 666 S&P 500 March 2009 stock market bottom, the financial world has operated with unprecedented Federal Reserve accommodation.
In response to the Great Recession and a nuclear winter in global credit, the Fed took on a herculean effort to restore order to chaos and save the economy. Fed Chairman Ben Bernanke embarked on a zero interest rate policy (ZIRP) by vastly expanding the Fed's open market operations, branded quantitative easing (QE). This means the Fed purchases government or other securities directly in the open market to increase money supply with the end goal of lowering interest rates. That, in effect, floods financial institutions with capital/liquidity to encourage them to take advantage of their ability to borrow short-term money at lower interest rates and lend it out at higher interest rates, thawing the sudden and steep credit contraction.
As expected, QE had many effects, but not necessarily the intended one of healing the economy. It forced savers and the risk averse to transfer money from sub-inflation-pace-yielding safe havens like money markets and CDs into the stock market for a shot at positive returns. It's also facilitated large corporations like Apple (AAPL) to change capital structures with borrowing costs below that of the government.
In February 2015, Apple was able to raise $6.5 billion through sales of 10-year notes and 30-year bonds to institutional investors, insurance companies and pension funds. Yields reportedly ranged from 1.6-3.5%. At the time of issuance, 10-year Treasury yields were hovering below 1.7% and Apple seemingly top ticked the market.
The Fed's hope has been for companies like Apple to use their cheap money policy to lower the hurdle rate on growth projects to invest in property, plants, equipment and labor. While this has happened with billion-dollar investments in Nevada for iCloud Server Farms and a new UFO-shaped campus in Cupertino, Calif., the larger part of those funds has gone to combat the effects of slowing global growth on Apple's share price. This has been accomplished by paying dividends and through huge share buybacks. From the start of this capital return program in August 2012 through March 2015, Apple has returned $112 billion to shareholders, including $80 billion in share repurchases. In April 2015, Apple upped its program to return capital to shareholders by 50% to $200 billion by the end of March 2017, according to capital return program data taken from Apple's investor relations website.
The most relevant effect for the readers of this article is on the stock market. Since the start of ZIRP and QE, the S&P 500 has steadily risen from the March 2009 low of 666.79 to an April 2015 high of 2125.92. The 218.83% increase of gains off the 2009 low and 34.89% increase of gains over the October 2007 top of 1576.09 (not including dividends) has investors wondering when the end will be in sight.
Given the recent lackluster economic data in the form of weak durable goods orders, stall-speed GDP, slowing consumer sentiment, and the lowest labor participation rate since 1978, Wall Street is left scratching its head. On one hand, growth is clearly slowing and Fed Chair Janet Yellen is engaged in a type of moral suasion saying, "I would highlight that equity market valuations at this point generally are quite high. They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there."