Why Shopify, Lucid, and Carvana Stocks All Dropped

What happened

It's Monday again, and stock markets are nervous -- and investors in tech stocks especially so. In early afternoon trading, shares of stocks as varied as e-commerce giant Shopify (SHOP -1.63%), luxury electric vehicle manufacturer Lucid Motors (LCID -0.69%), and online car-buying site Carvana (CVNA -2.59%) are all slumping, down 4%, 5.8%, and 9.2% respectively.

What do these three stocks have in common? They're all tech stocks. They all depend on a healthy consumer economy to grow their sales -- and their investors are all deathly afraid of the potential for a bad recession.

So what

In just a few days -- Oct. 13 -- the U.S. Bureau of Labor Statistics is due to report its latest batch of inflation numbers (for the month of September). Investors by and large are expecting good news, with analysts forecasting a drop in the headline inflation rate from 8.3% in August to 8.1% in September.  

Regardless, market pundits are worried the Federal Reserve won't ease up on its interest rate braking against a too-hot economy -- and worrying aloud that this will tip the economy into a recession.

Take growth stock icon Cathie Wood for example. In an open letter to the Federal Reserve this morning, Wood warned that the Fed is paying too much attention to high inflation numbers and strong employment reports, and not focusing enough on declining house prices and falling prices for raw materials such as copper and lumber. In Wood's view, the falling cost of such economic inputs foreshadows not just a lowering of inflation, but potential de-flation.  

In the face of this risk, Wood criticizes the Fed for enacting an "unprecedented 13-fold increase in interest rates during the last six months," and warns the Fed not to proceed with another rate hike in early November, which would work out to a 16-fold increase in interest rates. If the Fed goes ahead with that plan -- as it seems certain to do -- Wood fears it will cause a global economic "deflationary bust."

Now what

And I have to admit, that sounds a bit ominous. A "bust" implies something more serious than a mild recession, and that wouldn't be good news for companies that need consumers financially healthy so that they can continue shopping. And deflation -- the phenomenon where prices fall over time rather than rise -- could worsen such a bust. When consumers get used to the idea of prices getting cheaper over time, they're more inclined to delay purchases until cheaper prices arrive.

That could be particularly bad news for stocks like Shopify, Lucid, and Carvana -- all of which are losing money currently. In the absence of profits on which to value their stocks, investors have more often been valuing these companies on their sales, and their sales growth rates. But if deflation causes sales growth to slow, or sales to actually fall, while profits remain elusive, then there's really no good way to value the stocks at that point.

Now the "good" news for investors in these stocks is that, so far at least, deflation remains the least of their concerns. To the contrary, it's 8%-plus in-flation rates we're worried about. But even that good news isn't great, because it's this very inflation that's causing the Fed to raise interest rates, slow the economy, and dry up funding for future growth.

Long story short, investors seem to be caught in something of an economic conundrum at present. While the economy will eventually right itself -- it always does -- it's going to take time. Investors deciding to sell in the meantime, I fear, or at least to sell unprofitable stocks and reinvest in profitable ones, may be making the correct call.