There was no shortage of good news for the auto industry this week after the Federal Reserve cut short-term interest rates. The market overall moved higher late in the week, but auto stocks were a particularly big beneficiary.
According to data provided by S&P Global Market Intelligence, Carvana (CVNA 0.05%) surged as much as 21%, Mobileye (MBLY +8.59%) was up 26.4%, and Li Auto (LI +3.23%) was up 12.2%. The stocks are up 20.3%, 22.4%, and 11.2% respectively as of pre-market trading on Friday.
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The Fed's big move
In a somewhat surprising move, the Federal Reserve cut the federal funds rate by 50 basis points, double the expected cut. The fed funds rate impacts the short-term borrowing rate for banks in the U.S. It helps establish what the market rate will be, and investors often extrapolate the information to predict long-term rates.
A lower short-term rate will drive rates lower across the board and that could help reduce borrowing costs for car buyers.
How lower rates help car buyers
The impact on each of these businesses will be slightly different, but directionally the same. Lower rates will reduce the monthly payment. For example, a five-year $10,000 car loan with an interest rate of 5% carries a $188.71 monthly payment, but if the rate falls to 4% the payment falls to $184.17. That may seem small, but new car loans can be multiples higher and even a small reduction in monthly payments can make it easier for buyers to afford a vehicle.
It's also possible that lower rates drive a better economy. Companies have more incentive to invest in new projects if rates are lower, which is why the Fed is cutting rates. But the reality may be different.
The downside of lower rates
The irony of the week's rate moves is that rates impacting car loans went up this week, not down. Over the past three months, the three-year Treasury rate has fallen from 4.5% to 3.5%, but this week it went up slightly.
Part of the reason is investors worry the economy is getting worse. Lower rates are great, but if unemployment rises or inflation picks up that would be bad for car buyers. And that would impact everyone in the industry negatively.
Mobileye's Intel news
Mobileye did get some good news when Intel said it wouldn't sell its stake in the company. Shares of Mobileye have fallen recently on fear Intel will sell the stake as part of a restructuring plan, but that appears to be off the table for now.
The bottom line for auto stocks
Carvana will be helped more by the drop in market rates over the past few months than a Fed cut this week, so the market's reaction seems overdone. On the new vehicle side, Mobileye and Li Auto likely won't see much impact from lower rates. Li Auto faces massive tariffs in the U.S. and Europe so rates are a minor impact on demand. Mobileye sees growth ahead, but not until models are refreshed with new technology inside.
The market loved the auto industry this week, but investors may want to temper their expectations. The reaction may be overdone.
