Why auto stocks rose this week

There was no shortage of good news for the auto industry this week after the Federal Reserve cut short-term interest rates. Overall, the market moved higher at the end of the week, but auto stocks were a particularly big beneficiary.

According to data provided by S&P Global Market Intelligence, Carvan (CVNA 5.64%) increased by 21%, Mobileye (MBLY 14.99%) increased by 26.4% and Li Auto (LI 2.46%) increased by 12.2%. Shares rose 20.3%, 22.4% and 11.2% respectively in premarket trading on Friday.

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The big move by the Fed

In a somewhat surprising move, the Federal Reserve cut the federal funds rate by 50 basis points, double the expected cut. The federal funds rate affects the short-term lending rate for US banks. It helps set the market rate, and investors often extrapolate the information to predict long-term rates.

A lower rate in the short term will lead to lower rates overall, which could help lower 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 lower your monthly payment. For example, a five-year $10,000 car loan with an interest rate of 5% involves a monthly payment of $188.71, but if the rate drops to 4%, the payment drops to $184.17. This 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.

Lower fares are also likely to lead to better economics. Companies have more incentive to invest in new projects if rates are lower, which is why the Fed cuts rates. But the reality can be different.

The downside of lower rates

The irony of this week’s rate changes is that rates influencing auto loans rose this week, not fell. Over the past three months, the three-year Treasury rate has fallen from 4.5% to 3.5%, but this week it rose slightly.

Part of the reason is that investors fear the economy is getting worse. Lower rates are great, but if unemployment rises or inflation rises, it would be bad for car buyers. And that would have a negative impact on everyone in the industry.

Intel news from Mobileye

Mobileye received good news when Intel said he would not sell his stake in the company. Mobileye shares have recently fallen on fears that Intel will sell the stake as part of a restructuring plan, but that doesn’t seem to be the case for now.

The bottom line for auto stocks

Carvana will be helped more by falling market interest rates in recent months than by a Fed rate cut this week, so the market’s reaction seems overblown. On the new vehicle side, Mobileye and Li Auto probably won’t see much of an impact from the lower rates. Li Auto faces massive tariffs in the US and Europe, so the tariffs have a minor impact on demand. Mobileye sees growth in the future, but not until the 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 exaggerated.