To The Moon

• In a widely anticipated move, the Federal Reserve in the US raised short-term interest rates by 50 basis points to a target of 4.25% to 4.5%.
• The market did not react well to the new expected ceiling of 5.1% to be reached by the end of 2023, up from 4.6% only a couple of months ago.
• Apple stock has taken a hit, not unlike the rest of the broad market. This can be both bad for momentum in the short term and good for bargain hunting in the long run.

Federal Reserve: Not Ready To Let Up

On December 14, the US Central Bank increased the federal funds rate yet again. What was different this time is that the hike was smaller than in the past few Fed meetings: 50 instead of 75 basis points.

Without any context, a deceleration in the interest rate increase could be seen as good news. This is particularly true because CPI (inflation to the consumer) has finally shown signs of cooling off: from a multi-decade record of 9.1% in June to 7.1% in November (see below).

12-month percentage change, CPI, selected categories, not seasonally.

But of course, market participants looked under the hood. And what they saw was hawkishness from Fed chairman Jerome Powell, who said the following:

“We need to be honest with ourselves that there's inflation. Twelve-month core inflation is 6% CPI. That's three times our 2% target. Now, it's good to see progress, but let's just understand we have a long ways to go to get back to price stability.”

The so-called Fed dot plot also looked much more hawkish than dovish. Simply put: on average, the Federal Reserve’s 19 policymakers now believe that interest rates will rise to as much as 5.1% next year compared to September’s estimate of 4.6% (see below).

Some of the most hawkish FOMC participants even see rates staying above 4% as far out as 2025. Worth noting, tight monetary policy is not only about how much or how fast interest rates rise, but also about how long they stay high.

FOMC participants' assortments of appropriate monetary policy.

Apple Stock Down Following Fed Decision

On the day prior to the Fed’s monetary policy decision, Apple stock was trading at $145 apiece. As I mentioned recently, shares have been rangebound between $140 and $150 for about two or three months.

But as I write this sentence, AAPL has slid as far down as $136 – a 6% loss in as few as a day and a half. At these levels, Apple stock is approaching the June lows of the year, and remains firmly in bear market territory: down 24% YTD.

Should AAPL Investors Worry?

In my view, the main events of the week (not to mention company-specific news regarding the iPhone and the App Store) all point in the direction of share price weakness for AAPL in the short term. I have said a few times recently that the prospects for AAPL through the next earnings season are bleak.

At the same time, long-term AAPL investors might see this three-month decline in the share price – down 11%, during a period when the S&P 500 barely dropped (see below) – as an opportunity. It is no secret that AAPL produces the best returns when bought on weakness, and when held for long enough – more than merely a few weeks or months.

AAPL vs. S&P 500.