Tesla stock continues to defy expectations, with even recalls and potential tax credit losses failing to dent investor confidence. Late trading on Thursday saw the stock surge by nearly 5%, reaching above $250 per share. Meanwhile, the S&P 500 and Nasdaq Composite remained relatively stagnant.
The journey for Tesla stock has been anything but predictable. Earlier this week, shares experienced a downturn as a result of an extensive recall and the potential loss of Federal tax credits for certain Model 3 versions. However, it is worth noting that car stocks, in general, are not significantly impacted by recalls, as highlighted by industry experts. In this case, Tesla recalled approximately 2 million vehicles to update warning systems on autonomous driving features. The cost of rectifying the issue is minimal, the autonomous features remain functional, and adoption of such technologies across the industry is expected to increase steadily. Even the National Highway Traffic Safety Administration (NHTSA), the governing body overseeing recalls, agrees with this sentiment.
On the other hand, the tax-credit changes pose a more significant challenge. Investors were already aware that numerous electric vehicles (EVs) would gradually lose a portion of the $7,500 tax credit by 2024. The U.S. government wishes to avoid subsidizing EVs equipped with batteries sourced from China, as China is the largest EV battery manufacturer globally and supplies Tesla, along with several other automakers. Nevertheless, the news that two versions of the Model 3 would no longer be eligible for any portion of the $7,500 credit came as a surprise.
However, it is important to note that only a small portion of Tesla’s lineup is affected by this change. The primary concern arising from these credit modifications may be the impact on relative pricing. Performance Model 3 vehicles will now be priced lower than long-range models after adjusting for the credit.
While the financial implications of these credit and recall matters for Tesla remain uncertain, they undoubtedly influenced investor sentiment on Wednesday, causing the stock to drop by nearly 4%. However, the tide turned when the Federal Reserve, led by its chairman Jerome Powell, announced its decision to maintain interest rates at current levels. Additionally, the Fed’s dot plot indicated the likelihood of three or four rate cuts in 2024, further boosting market confidence.
Reflecting on recent events, it is evident that Tesla has shown remarkable resilience. Despite recalls and potential tax credit setbacks, investor faith in the company remains steadfast. With the Federal Reserve hinting at potential interest-rate cuts, the future appears promising for Tesla and its stock value.
The Impact of Lower Rates on Car Stocks
The recent surge in the Nasdaq Composite and the record-breaking performance of the Dow Jones Industrial Average have had a positive effect on car stocks. General Motors shares saw an increase of about 9%, while Ford Motor stock gained around 11%. Tesla shares also witnessed a growth of 8%.
One of the reasons for this upward momentum in car stocks is the impact of lower rates. Lower rates result in reduced car payments for customers, which ultimately contributes to increased car demand. Tesla CEO Elon Musk has been concerned about the negative influence higher rates have had on the car industry for quite some time.
However, it’s important to note that when the entire market is rallying, it becomes challenging for any stock to decline. In the short term, a significant portion of a stock’s return is influenced by overall market performance.
Traders and portfolio managers closely monitor a stock’s beta to gauge its performance relative to the market. Tesla’s beta versus the S&P 500 in the past year has been approximately two. This indicates that, roughly speaking, a 1% rise in the S&P should lead to a 2% increase in Tesla stock.
Considering that the S&P experienced a gain of approximately 1.5% over the past few trading days, Tesla stock should have been expected to rise by around 3% assuming all other factors remained constant. However, shares actually gained about 5.5%, suggesting that the impact of lower rates on car stocks played a role in this additional 2.5% increase.
Looking ahead, Tesla stock currently finds itself in the middle of its trading range over the past six months due to this recent surge. Investors are eagerly awaiting any significant developments that could drive further growth. This could include fourth-quarter deliveries, earnings reports, or even continued effects from lower rates.
Ultimately, both Tesla and other stocks are likely to benefit from lower rates, while the ongoing impact of the market’s performance remains a key factor to monitor.