Why Tesla Stock Is Toast Today

view original post

What happened

Tesla (NASDAQ:TSLA) took a tumble along with the rest of the tech stock market this afternoon, succumbing to interest rate fears after the U.S. Federal Reserve made public its plans to withdraw support from the high-flying U.S. stock market.

As of 3:25 p.m. ET, that decision has cost Tesla stock 5.5%.

Image source: Getty Images.

So what

CNBC has the story: From just-published minutes from the Fed’s December meeting, it’s apparent that officials “are ready to dial back policy help aggressively,” in particular, by first slowing then reversing bond purchases (i.e., selling off bonds already purchased) “in the coming months.”  

The Fed’s goal isn’t to engineer a stock market crash (although that may be the effect) but rather to dry up excess liquidity that is accelerating inflation in the economy and to raise interest rates in an attempt to dial back that inflation.

As previously reported, the Fed also plans to raise targeted interest rates three times in 2022 and then another three times in 2023 — and then another couple more times in 2024. Number of times multiplied by one quarter point per each raise works out to interest rates two years from now that could sit two full percentage points above the zero-to-0.25 percent rate that is targeted today.  

Now what

Interest rates could thus rise 10 times in three years — or just 2 percentage points — depending on how you look at the numbers. Right now, investors are looking at them the first way, and they’re downright scared of what this might do to the stock market.

They’re scared enough, indeed, that they’re ignoring the fact that three separate analysts — Barclays, RBC Capital, and Mizuho — raised their target prices on Tesla stock today to $325, $1,005, and $1,300, respectively, according to a report from TheFly.com. Instead, they’re heeding the advice that worked so well for growth stock investors in 2021: Don’t fight the Fed.

Of course, last year that advice meant “go ahead and buy stocks regardless of how insanely overvalued they look.” Today, in an environment where the Fed is not implicitly promising to ensure that stock prices only go up, that same advice has a different meaning entirely.

Take a closer look at valuation, and if a stock costs 330 times earnings — as Tesla does — then sell.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.