Market Sensitivity to the News: A Study of Tesla and Ford Motors

By Kyra Ward, Editor-in-chief, Economics and International Relations Undergraduate                 

Isabelle Peek, Correspondent, Economics Undergraduate

 

The stock market is a critical facet of current economic life. In 2017, the combined stock markets around the globe traded roughly 200 billion dollars a day. If investors are smart or lucky with their predictions the massive amount of movement could make investors astronomically wealthy, however, betting on the wrong side of a trend can also have devastating results. For this reason that if an agent is looking to invest in stocks, understanding trends in the stock market is essential. The stock market can be seen as a reflection of the health of the entire economy, and in no small part facilitates the type of continued economic growth that we have seen in many developed countries around the world. The stock market precariously balances on the public’s (public not just referring to individual investors, but public and private companies as well) analysis of the capacity for economic growth increased market demand and also current expectations of firm’s future performance.

 

This valuation of a company’s publicly traded stock occurs once a company goes public which, means that anyone can buy shares and thus become part owners of the company. When going public a company typically brings in an accredited outside source, typically an investment bank, to make an evaluation of the worth of the company and thus at what price the company should issues shares of their stock. This is an IPO (Initial Public Offering) of what they believe their stock prices should be. However, after they go public the company has little control over what the value of the stock is. If the public believes that the company is over-valued or under-valued the resulting climb or fall in their stock prices is reflected in the buying and selling of their stocks on any given day. The fluctuation in price of stocks can either be relatively consistent or volatile, but this is also subject to change. Companies who have had very consistent histories of stock pricing can have poor growth, or positive or negative news relative to management or industry trends and suddenly become very volatile investment options. On the other hand, risky stocks can with time and appropriately valued future growth projections become more consistently priced. A company (or companies) history of volatility or consistency is also known as that company’s market sensitivity. Many different factors can affect market sensitivity, but the one I am analysing in this article is a company’s market sensitivity to news. To do this I am going to compare two motor companies, Tesla and Ford. Ford is an older and more established Motor company, it went public on the stock market back in 1956, and has been a staple American brand ever since. Tesla is relatively new, going public in 2010, and has become one of the most profitable and volatile stocks on the market. Elon Musk, formerly Tesla’s CEO, is sometimes described as a mad genius, and has a knack for disrupting markets in innovative ways. However, despite all the excitement Tesla has yet to return a positive profit, while this is not entirely unknown in the internet age and for a new company, take the example of Facebook for instance, it means that the current price of their stocks relies entirely on expectations of future earnings.

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As previously mentioned, Tesla is a relatively volatile stock. In the course of 52 weeks the stock fluctuated between a price of $244.59 to $387.46. This compares to Ford Motor company who in the same time frame had their stocks sell for $8.95 to $13.48. Ford’s stock fluctuated roughly $4 over the course of 52 weeks whereas Tesla’s was fluctuating around $142. This shows that although Tesla’s stock is significantly higher, it is also a bigger risk because of its volatility, whereas Ford’s stock is relatively stable over time, but with a smaller margin of earnings and return.

 

It is important to keep in mind that there are a litany of factors which can effect stock prices and that news is certainly not the only one. All the analysis in this article is speculative and assumes that despite relative correlation, there is not enough to prove causation. However, by examining the relative trends of stock prices after big news stories we can observe trends in the movement of stock prices.

To determine Ford and Tesla’s sensitivity to news (which for the purposes of this article does not just refer to journalism, but includes any statements released about the company) it is necessary to see when big stories occurred and the relative change in stock prices around those dates. This was done by looking at the major news stories in the past 52 weeks. For Ford the biggest news story which created a negative perception of the company in the past year was the impact of the retaliatory tariffs from China and Canada against the United States. This was in reaction to the US’ higher tariffs on steel and other products. China in particular introduced a new set of tariffs specifically on imported cars, news which was published by Reuters on the 5th of July 2018. That day there was a -2.73% fall in the price of Ford’s stock (from $11.10 to $11.05). Although there does seem to be a correlation between the two events one of the largest drops in Fords stock prices don’t correlate to any major news story. Using Google News as a litmus test for large and relevant stories, from January 14th till February 21st there were no large news stories which could have impacted Ford. According to a NASDAQ analysis Ford’s earning report which was released on the 24th of January seems to be the driving factor in the fall of Ford’s stock prices. Ultimately, however, Ford’s stock price (although currently having a downward trend) has been a relatively stable and non-volatile stock in the past 52 weeks.

 

Tesla has been front page news much more frequently than Ford this past year. Back in late March of 2018 there was a car crash by an autonomous Tesla car, which killed the driver inside, additionally, the news started reporting that Tesla was not going to be able reach its quarterly manufacturing goal. Within 3 days the company’s market value fell by $8 billion (an 8% fall in stock prices). Between the 23rd and the 28th Tesla’s stock went from $311.25 to $257.78, a 17% fall. This dramatic shift both shows the optimism and doubt about Tesla as a company. Similarly volatile but with positive news for the investors, from June 5th to the 11th Elon Musk reported that he was going to cut 9% of the workforce to increase profitability of the company. This indicated that Elon Musk was seriously taking into account the economic viability of the company it sent stock prices soaring. On the 5th of June Tesla’s stock closed at $291.13 and by the 11th it had risen to $332.1, this was a 14% rise in the course of 6 days. Stories about Tesla and Elon Musk appear to have a much more dramatic impact on the stock prices of the company than for Ford. The most recent example of the news dramatically effecting Tesla’s stock is when at 9:48am the 7th of August Elon Musk tweeted that he was going to take the company private again at $420 per share. Within a day Tesla’s stock went from $343.84 at opening to $379.57 when it closed. Musk’s tweet had created a buying frenzy, surging the price of the stock 10%. However, when it was discovered that the $420 stock price was in part a joke for his weed loving girlfriend rather than an actual valuation–and that Musk had no active plans to take the company private–the stock plummeted.

 

As with any investment on the stock market there is a trade-off between Ford and Tesla. Tesla trades at a very high price, on days with good news stocks can rise 10% with incredibly high margins. However, it also is incredibly sensitive to the news cycle and can similarly fall dramatically. Because most of the value in the company is based on the potential of future earnings the prices of the stocks are mostly dependent on what the public knows about the company, something that is relayed through the news. Ford on the other hand seems to be a much safer investment. You will not have as much upside with good news, but similarly the days with bad news won’t cause such large losses. Ford, unlike Tesla, has a track record of being a reliable company with a history of positive earnings. Though, it is also true that Ford’s current earnings are negative and its stock has been slowly declining for a while. I would conclude that Tesla is much more sensitive to the news cycle than Ford. Ford shows a resilience in prices over time despite good or bad news, whereas Tesla’s stock is much more volatile based on what new information exists on any given day. Ultimately regardless of what investments companies and individuals make it does seem imperative to analyse the potential sensitivity those companies have towards news cycles.


 

Featured photo provided by Pexels

First photo provided by Zigwheels.com

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