Apple’s [AAPL] share price has soared in recent weeks from as low as $224.37 on 23 March as the coronavirus pandemic chilled investors, to an all-time high of $390.90 on 15 July.
Several factors have helped Apple’s share price during this difficult period, such as continued demand for smartphones during the crisis as locked-down consumers downloaded apps to keep them entertained, get work done or order groceries.
But another driver behind Apple’s share price has been the US Federal Reserve’s programme to bolster the corporate debt market and ensure that companies have the cash they need to cope with the severe consequences of the coronavirus.
Between 22 June and 30 June, the Fed purchased bonds from 330 companies worth $1.33bn, including $25.5m of Apple bonds, $26.9m of Verizon Communications [VZ] bonds, $26.3m of AT&T [T] bonds, $3.2m of Expedia [EXPE] and $10.1m of the Ford Motor Company [F].
Alongside other beneficiaries, Apple’s share price leapt from $349.72 on 19 June to its $383.68 high in July.
Verizon Communications has risen from $53.16 on 26 June to $54.49, AT&T’s share price is up from $29.08 to $30.13, the US unit of Volkswagen climbed from €133.32 to €139.98, Anheuser-Busch is up from $48.05 to $53.76 and Expedia Group’s share price has jumped from $77.59 to $83.54 over the same period.
Why is the Fed buying up debt?
The central bank’s scheme, which was first announced in March, involves the purchase of up to $250bn of debt already issued by companies and up to $500bn worth of newly issued bonds, according to The Wall Street Journal.
The aim is to prevent as many bankruptcies as possible during this volatile period. In turn, Jerome Powell, chairman of the Fed, states that “the intended beneficiaries”, that is the workers, “are able to keep their jobs because companies can finance themselves”.
It targets investment-grade-rated companies with maturities no longer than five years in duration and is backed by US Treasury investment capital to absorb any default losses.
Despite this safeguard, it has not proven universally popular, especially when it involves companies the size of Apple – the firm’s share price surge now supporting a mammoth $1.69trn market cap.
“It does sort of make you wonder if it makes sense for them to be buying bonds of Apple. Spreads are so tight and stocks are doing so well. You wouldn’t think they would need support from the Fed,” Kathy Jones, director of fixed income at Charles Schwab, states “I do think it’s moral hazard. I think it’s something they’re going to have to deal with when things settle down. There will be accusations that they committed money in ways that didn’t make sense and didn’t help the average Joe.”
“It does sort of make you wonder if it makes sense for them to be buying bonds of Apple. Spreads are so tight and stocks are doing so well. You wouldn’t think they would need support from the Fed” - Kathy Jones, director of fixed income at Charles Schwab
Building a bubble?
There have also been concerns that the intervention from the Fed could be helping to create asset bubbles in the market including the tech sector.
When this support from the Fed is taken away, and the market begins to follow economic and consumer confidence trends more closely, where will it leave the share prices of the tech, consumer and automotive stocks?
“Whether goosing asset prices, as some have accused the Fed of doing, is the best way to support the economy is open to debate,” Russ Mould, investment director at AJ Bell, says.
“Whether goosing asset prices, as some have accused the Fed of doing, is the best way to support the economy is open to debate” - Russ Mould, investment director at AJ Bell
Mould suggests that the Fed could be becoming nervous about rumours of bubbles emerging, particularly in tech and biotech stocks, the dominant performance of which “makes sense in the context of a low-growth, low-inflation, low interest-rate world”.
He says that if the current situation continues, then the case for further outperformance of these stocks is easy to make, even in the face of concerns over. “That is despite grumblings about valuations and bubbles from investors who remember the way in which media and technology stocks frothed up and then boiled over in the late 1990’s, with ultimately damaging results to portfolios,” Mould explains.
But Brian Chappatta, writing in Bloomberg, believes Apple and by extension, other firms involved in the programme will continue to see share price success.
“Rather than focus on the American worker, the stated goal is to ‘support market liquidity for corporate debt,’ and keep borrowing costs down for creditworthy firms,” he writes.
“So, there’s every reason to expect that Apple can and will issue bonds again in the near future, at an even cheaper rate, to fund stock buybacks and dividends. That, in turn, would most likely support share prices.”
“So, there’s every reason to expect that Apple can and will issue bonds again in the near future, at an even cheaper rate, to fund stock buybacks and dividends. That, in turn, would most likely support share prices” - Brian Chappatta
David Spika, president of GuideStone Capital Management, is also confident of more tech support. “When the Fed forces interest rates to zero, they’re going to push investors on the risk curve to get income and growth. If I’m going to be forced into equities, which is what the Fed’s clearly doing, I’m going to own the equities that I feel the best about and large-cap tech has become a safe-haven play,” he says.
Deutsche Bank analyst Jeriel Ong is particularly bullish about Apple’s share price despite risks ahead such as high unemployment and less spending and a potential second coronavirus wave closing stores.
He foresees a V-shaped recovery in Apple’s product sales and demand for services, which will push the share price as high as $400 — a 4.3% increase on 10 July’s closing high.
|PE ratio (TTM)||30.71|
|Quarterly Revenue Growth (YoY)||0.5%|
Apple share price vitals, Yahoo Finance, 16 July 2020