Insights

Why Shares of Tesla Fell Today

What happened

Shares in electric vehicle (EV) pioneer Tesla (NASDAQ: TSLA) were down by 4.8% as of 11:59 a.m. ET Monday as the market digested a few pieces of bad news for the company.

First, Friday’s Consumer Price Index (CPI) report showed the U.S. inflation rate was a whopping 8.6% year over year in May. That’s bad news because high inflation usually leads to higher interest rates, and higher interest rates make car loans more expensive. Indeed, the benchmark 10-year U.S. Treasury yield rose again to 3.3%; it was just 1.7% at the start of March.

Second, niche news website Electrek obtained a leaked email that Tesla CEO Elon Musk sent to company employees in which he said that Tesla had had a “very tough quarter” due to supply chain challenges in China, and called for employees to “rally hard to recover.” This could be a sign that the EV maker is behind on its production targets and is pushing hard to catch up at the end of the quarter. 

Third, China is reimposing some restrictions in the major cities of Beijing and Shanghai under its “zero COVID” policy after clusters of new cases were found, and there are concerns that it could soon reinstitute more intense lockdowns. That would be a negative for companies sourcing products from China, as noted above. 

So what

Rising interest rates, tough quarters, possible China lockdowns — it’s not good news, particularly as an easing of COVID-19 restrictions in China is necessary in order to get supply chains flowing smoothly again. That would help ease the supply-and-demand imbalances that are pushing inflation higher, which in turn is leading to rising interest rates.

Still, investor sentiment on these issues can change quickly, provided China does ease restrictions. Unfortunately, it will be a bumpy ride until that happens, and Tesla investors may have to accept that the company won’t meet its 2022 production target of 1.5 million vehicles

Now what

Investors will have to wait and see what comes next while keeping an eye on interest rates and their impact on the broader economy, with a particular focus on consumer spending patterns. If interest rates keep rising, sectors like housing and autos may see some weakness. However, it’s too early to conclude that will happen.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.

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