The Recent Downfall in Tesla Is a Key Indicator of a Coming Stock Market Crash
Tesla Inc (NASDAQ:TSLA) has become the barometer of the stock market. Its recent downfall from about $385.00 per share to $310.00 per share in just five days suggests a serious correction for the stock and the brand’s investment appeal. More significantly, such a dramatic drop raises doubts beyond Tesla stock itself; it suggests a major stock market crash is coming.
Nobody could have expected the trigger for Tesla stock’s vindictive encounter with market reality to be so effective. Many have attributed it to the fact that Tesla failed to secure a top safety rating for its five-door “Model S” sedan in a recent crash test. The news, which came just as the company announced the early start of production for the “Model 3,” shocked the markets like a giant lithium battery.
Investors did not like this unfortunate coincidence. They expected the Model 3 to be the car to put Tesla in the one-million-cars-a-year production club. Tesla stock had managed to climb to its steep valuation thanks to such expectations. Now, there is doubt that in the face of more mainstream manufacturing competition, Tesla will lose its marketing and customer appeal.
Volvo, a traditional luxury car brand, announced that starting in 2019, every model it offers will have an electric or hybrid variant. BMW may introduce a fully electric version of its “3-series” sports sedan. Volkswagen, through its brands, including “Audi,” “Porsche,” and others will have many more electric vehicles on offer by 2018. General Motors has already introduced a mid-price fully electric sedan at the end of 2016. It performs just as well as a Model 3, but costs less.
As Tesla stock started trading around $318.00-to-$311.00 per share, it entered bear territory. Tesla stock has surrendered some 20% on the record set in June. Moreover, in recent weeks, analysts from various noted Wall Street firms, including Goldman Sachs Group Inc (NYSE:GS), have expressed doubts about Tesla’s ability to fulfill its deliveries in the second quarter (Source: “Tesla Is Getting Hammered Today. Here’s Why,” Fortune, July 5, 2017.)
Tesla Stock’s Downfall Tells a Bigger Story About the Market
But, Tesla’s recent and dubious performance may only partly be about Tesla. Tesla stock might well represent a barometer of the market. The barometer is making stock market crash predictions. As many of those who believe a stock market crash is coming, the bear market will likely start from the tech stocks, the very same that have reached such lofty valuations since the stock market–if not the actual economy–started to recover in 2009.
To lose 20% in five days just because a car model received a four-star rating instead of a five-star one in a crash test seems excessive. Unless, of course, the markets see a weakness that goes beyond Tesla, sensing that a stock market crash is coming. The kind of panic that has affected Tesla investors, who likely hold great expectations for NASDAQ-listed stocks and “technology,” suggests that Tesla is not alone.
Other tech stocks, at the first sign of trouble, could react in the same manner. The euphoric rise of the tech stocks (consider that Amazon.com, Inc. (NASDAQ:AMZN) crossed the $1,000-per-share mark in 2017) likely prompted may investors to borrow in order to invest. They may, in fact, have invested on margin. (Source: “Opinion: Does Tesla’s plunge signal the end for growth stocks?,” MarketWatch, July 7, 2017.)
That means that the stock market rests in shaky ground as earnings season comes up. Companies must beat any previous guidance indications, because the gains have already been included in the current valuations of the Facebook, Inc. (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOGL), and Amazon stocks. If they fall, they will drag down even solid stocks with them in a massive collapse.face
Tesla is reporting its earnings in August and analysts expect a loss of $0.67 per share. That, combined with battery shortages and flattening sales of the Model S, with only rudimentary deliveries for the Model 3 for now, could force Tesla down to $180.00-$190.00 faster than its cars accelerate from zero to 60.
Investors who have already experienced the dot-com bubble and the crash of 2008 are sure to raise many legitimate concerns about the recent tech stock rally. It has seemed interminable and unstoppable, but it was a paper strength. All it took, rather ironically, was an electric car’s disappointing crash test to raise serious doubts about the market’s overall health.
The NASDAQ has experienced nine years of an interrupted bull market. In the race for top capitalization, five of the most famous companies in the world have been the protagonists, including Amazon, Microsoft, Apple Inc. (NASDAQ:AAPL), Alphabet, and Facebook. Tesla and a handful of others have been smaller ‘locomotives’ of this trend, but they have gained such visibility in the worlds of finance and pop culture as to increase their market “influencer” value.
But, the party is about to end and the tech train is reaching the end of the line. There have been tremors, such as on June 12, 2017, but these were mere warning signs. Tesla’s 20% drop will send ripple waves, but the next big tech stock to announce a weakness could cause the rest to fall like a house of cards.
Tesla will have sent a reminder to the wise investor to start lightening their tech stock holdings or positions, converting to cash or other resources. The sluggish financial conditions in the United States and the slow economic recovery (that is, the real economy, not the financial services one), can only worsen as a number of macro risks to the global economy have emerged from U.S. relations with Russia to North Korea.
Finally, it may have occurred to investors that the financial markets have increased in popularity in response to the low interest rates. The Federal Reserve and the European Central Bank (ECB) at different times have progressively lowered nominal interest rates since 2009 to fuel economic stimulus. Now, both intend to raise rates. The Fed has already started this process and it won’t be long before the effects will rear their ugly head. It’s time for investors think about a period of legitimate reflection.