Ford Motor Company (F), BorgWarner Inc. (BWA): How Will a Tightened Monetary Policy Impact the Performance of Auto Companies?

Page 1 of 2

Federal Reserve Bank Chair Ben Bernanke has recently been giving comments that suggest that the economy might soon be witnessing a tightened monetary policy. And it has been a common saying, that given that the weight of the economic world is on his shoulders, when Ben Bernanke hiccups, the stock market hiccups with him.

Ford Motor Company (NYSE:F)

Meanwhile, the U.S. auto industry has lately been flying. After some lower-than-anticipated sales figures for the month of March and April, the industry displayed a solid rebound in May, which suggests that the industry is set to show some record high number in 2013.

One of the reasons of rising auto sales has been availability of cheap credit. This may not remain the same in case of rising interest rates. The question to be asked is: What will be the impact of a tightened monetary policy on auto sales and hence on the performance of auto companies?

Is Fed tightening really a headwind for Auto companies?

Fed tightening may have no near-term impact on US auto sales but could be a headwind to the auto stocks.

With the prospect of Fed tightening via tapering looming at some point in the future, investors have been wary of the future of auto companies. To examine the impact, the historic relation between the fed funds rate (in the past the mechanism for Fed tightening), U.S. light vehicle sales figures and the relative performance of auto stocks were analyzed. It was found out that the rising interest rates have only a modest impact on the overall auto sales.

However, headwinds do arise for automotive companies in a rising interest rate environment, especially for the Original Equipment Manufacturers (OEMs), the companies which make car parts.

Rising interest rates on monthly auto loan payments is de minimis.

It is interesting to note that rising interest rates are expected to have no to minimal impact on monthly loan payments. Using a $25,000 illustrative car as an example, for every 100 basis point (1%) increase in the interest rate the monthly payment (currently $548 on a 2.5%, 48 month loan) would increase by about $11 – not overwhelming by any means.

Is there any correlation between interest rates and auto sales?

The Seasonally Adjusted Annual Rate (SAAR) figure can increase in the initial year of tightening, even though there is only modest correlation between rising interest rates and overall auto sales.

Many readers get confused between the actual sales and the SAAR figure. While the actual sales figure shows us the actual amount of vehicles (in units) that have been sold in a particular month, the SAAR figure depicts the selling rate of vehicles for a particular month. By this I mean that a SAAR rate of 15 million for a particular month indicates that the auto industry is on pace to sell 15 million vehicles on an annual basis, or 1.25 million per month.

Looking at key tightening cycles, U.S. SAAR generally improves over the first year after the initial tightening. In 5 of the last 6 tightening cycles, SAAR increased over the initial year, with the exception of 1986-1989. In about half the cycles, SAAR fell by the end of the tightening cycle (perhaps as the Fed eases after seeing economic conditions weaken), but in three other cycles SAAR finished higher at the end of tightening.

What about auto stocks?

Auto stocks tend to under-perform in periods of rising interest rates as investors resort to the “old playbook” of rotating out of interest-rate sensitive sectors.

In determining the impact on auto stocks, Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) provided the largest data-set with which to work. The result was compelling – during the six previous periods of sustained monetary policy tightening, Ford Motor Company (NYSE:F) significantly under-performed the S&P each period while General Motors Company (NYSE:GM) under-performed the S&P in five of the six periods.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!