Shares of high-volatility stocks and companies that could benefit from lower interest rates had a great day today as the market anticipates a September rate cut by the Federal Reserve. Not only could interest rates be down, but there are signs the economy won't go into too deep of a recession if there is one at all.
Shares of Tesla (TSLA +0.73%) jumped as much as 5.6% today, Lucid (LCID 0.32%) popped 6.2%, and Quantumscape (QS 2.56%) was up 6.4%. Shares closed the day up 5.4%, 5.9%, and 6.3%, respectively.
NASDAQ: TSLA
Key Data Points
Inflation and interest rates
A wholesale inflation measure called the producer price index (PPI) was released today and showed a 0.1% increase in July, below the 0.2% forecast. PPI was up just 2.2% from a year ago, which was down sharply from the 2.7% increase in June.
This is being watched closely because the consumer price index (CPI), a key measure of inflation, comes out tomorrow. If the CPI is at or below the expected 0.2% month-over-month increase, it would likely allow the Federal Reserve to cut interest rates because inflation would be under control.
The Federal Reserve has a dual mandate to keep inflation under control and maximize employment, so traders expect that to mean a rate cut in September. According to Bloomberg, the 10-year U.S. government debt rate fell 6 basis points today alone and is down 33 basis points in the past month.
Rates and the EV story
One of the factors holding back large purchases like automobiles and homes is higher interest rates than we saw a few years ago. Tesla's Elon Musk has talked about this as a headwind to the company's growth, and there's some truth to that.
What investors are betting today is that lower rates will spur more demand for EVs.
What this theory overlooks is that more factors go into purchasing decisions than just rates. For example, sales at Ford and General Motors increased over the past year despite high rates, and they fell at Tesla. Are EV buyers more interest-rate sensitive than truck buyers?
TSLA Revenue (TTM) data by YCharts.
When you look at Tesla's shares trading for multiples between 10 times and 20 times more expensive than its Detroit rivals, the move today makes even less sense.
When you look at free cash flow from the three companies, it looks more like increased competition and weakening demand for electric vehicles are bigger problems than just interest rates.
TSLA Free Cash Flow data by YCharts.
Lowering the borrowing cost for a vehicle doesn't change the competitive dynamics in the industry.
A short-lived bounce
Until Lucid and Quantumscape can scale production and show the ability to make money, they will be extremely risky stocks. Tesla also needs to show it can increase sales without discounting what it makes.
I don't think lower interest rates fundamentally change the challenges facing the EV market today, and that's why I'm staying away from this bounce. Shares just look too risky to buy today.
