Interest rate drop gives automotive stocks a boost

This week, the automotive industry experienced a significant boost after the Federal Reserve cut short-term interest rates. Despite a general market recovery, stocks in the automotive sector benefited particularly strongly. Data from S&P Global Market Intelligence shows that Carvana surged by a substantial 21%, Mobileye by 26.4%, and Li Auto by 12.2%. By mid-morning trading on Friday, these stocks had gained 20.3%, 22.4%, and 11.2%, respectively. In a somewhat surprising move, the Federal Reserve reduced the benchmark interest rate by 50 basis points, double the expected cut. The benchmark rate influences short-term borrowing costs for banks in the U.S. and thereby sets the foundation for market interest rates. Investors often derive long-term interest rate trends from this. A lower short-term interest rate drives overall interest rates down, potentially reducing borrowing costs for car buyers. For companies, this means lower monthly payments and thus potentially higher sales opportunities. For example, a five-year car loan of $10,000 at an interest rate of 5% requires monthly payments of $188.71. If the rate drops to 4%, the monthly payment decreases to $184.17. Lower interest rates could also boost the entire economy as companies would be more willing to invest in new projects. The Fed’s main goal is to stimulate economic growth through rate cuts. However, the reality might be different. Ironically, auto loan rates have risen this week, not fallen. Although the three-year Treasury rate has dropped from 4.5% to 3.5% over the past three months, it saw a slight increase this week. The issue lies in investors fearing economic deterioration. Even if rates drop, rising unemployment or increasing inflation could reduce car buyers' purchasing power, negatively affecting the entire industry. Mobileye additionally benefited from the news that Intel will not sell its shares in the company. This calmed the markets after doubts arose that Intel might divest as part of a restructuring plan. While Carvana has benefited more from the declining market interest rates of recent months than from this week's Fed cut, Mobileye and Li Auto might be less affected by lower rates. Li Auto faces massive tariffs in the U.S. and Europe, thus interest rate fluctuations have minimal impact on demand. Mobileye sees growth potential but only when new models with updated technology come to market. Despite the positive market reactions, investors should remain cautious as expectations may be overly optimistic.