Easily bounding over any obstacle in their path on Hump Day, electric-vehicle (EV) stocks were big winners on the stock exchange during that trading session.
The surge was apparent in numerous segments of the EV market. Truck-maker Nikola (NKLA 11.44%) enjoyed a more than 11% surge, while pickup and SUV specialist Rivian (RIVN 8.07%) cruised to an 8% gain. Ultra-luxury manufacturer Lucid Group (LCID 6.40%) rose by 6% in price, and even its frequently struggling peer Fisker (FSR 2.78%) had a positive day, with a nearly 3% boost.
The Fed speeds to the rescue
While there were, as usual, scattered developments of note with numerous EV companies, the real driver of the sector was external. These businesses were boosted by the Federal Reserve’s Open Market Committee decision to keep the Fed’s key interest rate steady for the third time in a row — specifically within a range of 5.25% to 5.5%.
Investors used to the central bank’s frequent rate hikes over the past few years breathed a grateful sigh on the continued pause.
Additionally, the Committee signaled that it would consider three rate cuts next year. That reversal from recent policy was greeted happily by market participants invested in a variety of sectors.
One of those industries is EVs. It isn’t hard to ascertain the main reason why. Higher interest rates mean higher costs of borrowing.
Vehicle making is heavily capital intensive, and borrowing to raise at least some of this capital is standard operating procedure. This need is especially acute in the EV sphere, which is full of young companies that don’t have the scope and scale of their incumbent auto rivals.
Steady rates for now and likely lower ones in the proximate future give such companies more space to borrow funds. They also open up possibilities for the refinancing of existing debt, and lower interest payments should help lift the ever-important bottom lines of those businesses.
An accelerating desire for risk
Another benefit of lower rates is that they tend to siphon investment money away from “safe” assets appreciate bonds toward riskier plays.
The anticipation of Fed rate cuts is a key factor behind the seemingly unstoppable rise of cryptocurrencies lately, for example. While EV stocks aren’t considered to be quite as volatile and high-wire as cryptos, they still fall into the “proceed with care and caution” bucket.
The Wednesday rally in EV companies was encouraging and should give the sector a nice surge of bullishness. These businesses can’t just coast on the optimism of cheaper financing, though; they’ll have to perform to expectations to keep investors behind the wheel.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
