The stock market as a whole is seeing some selling pressure build this week. If things end today on the market’s current trajectory, we could be set up for one of the worst weeks in a while. For Tesla (NASDAQ:TSLA), it’s been an even more precarious ride, with TSLA stock down nearly 7% over the past week and more than 3% today, underperforming the overall market.
There are many reasons for this decline. On the macro front, this week’s Federal Open Market Committee (FOMC) meeting, in which the Federal Reserve held rates steady, provided downside momentum for both bond and equity markets. That’s because, despite this pause, expectations are that the Fed will raise rates one more time this year. That would put even more pressure on valuations of high-growth stocks like Tesla and continue to put pressure on auto loan rates, which are already sky-high relative to where they’ve been over the past decade.
Additionally, reports that long-time Tesla bull Cathie Wood has dumped more shares of TSLA stock have some growth investors concerned. Recent reports indicate that Wood sold more than 170,000 shares across all her funds over the past week.
Let’s dive into what investors may want to make of these recent developments.
TSLA Stock Sinks, as Investors Price in Risks
Personally, I think Tesla’s decline this week has more to do with the macro environment than news about Cathie Wood’s buying and selling activity. As an active manager, Wood’s job is to adjust her portfolio on a very frequent basis. This has often meant selling her winners and buying underperforming stocks, at least since the market peaked in early 2022 for growth stocks.
Tesla investors now have to factor in higher-for-longer rates into their models. From a valuation standpoint, most investors know that discount rates matter. However, I think the bigger issue for Tesla is the reality that auto loans could continue higher from here. Another quarter-point rate hike would likely flow through to higher auto loan rates, which currently stand at an average of 6.44% as of last week.
This number assumes an average FICO score of 714 (the U.S. average as of Aug. 30) for a new car. Used car rates are substantially higher, making the car-buying experience one many households simply dread. For those with deep subprime FICO scores (between 300 and 500), auto loan rates are 14.18% for new cars and 21.38% for used vehicles. Many buyers will simply be priced out of the automobile market.
Demand for Tesla vehicles, which remain near the higher end of the price spectrum for most buyers (despite price cuts), is likely to diminish the higher interest rates go and the longer they stay at these levels. For those considering TSLA stock, this is perhaps the biggest consideration right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
