Markets

GM's Pessimism May Have Broader Implications for Stocks

Today is a big day for stocks in the American auto industry on many fronts. News is coming thick and fast, some expected and some unexpected. The expected are earnings, with GM (GM) reporting this morning and Ford (F) releasing their Q2 data later today after the market close. The unexpected was the tragic news that the CEO of Fiat Chrysler (FCAU), Sergio Marchionne, passed away last night just days after stepping down due to illness.

Marchionne was, by all accounts, liked and respected throughout the industry and will be sorely missed. His biggest legacy is simple: Fiat Chrysler is still with us. He was appointed CEO of Fiat in 2004, then, following the 2014 merger with Chrysler, became the leader of the joint company.

His ability and intent were rapidly clear; by the end of that year he was able to announce that the nearly $13 billion of debt had been wiped out. That is a remarkable feat, and it almost certainly saved Chrysler, but his successor, the former head of Jeep Mike Manley, takes over at a worrying time.

That was made clear this morning when GM reported earnings. The earnings themselves were good; GM beat expectations, albeit only by a small margin in each case, for both revenue and EPS, but the stock is sharply lower in early exchanges. As is so often the case, it is not the performance over the last few months that is driving GM’s stock, it is the outlook for the future.

In an article last week as earnings season got underway, I said “If there is a danger for the stock market in this week’s releases, it will be in the outlook rather than the results themselves.”

That was the case with GM, who cut their forward guidance for 2018 to $6 from a previous range of $6.30-$6.60, causing the stock to do this:

The revision was prompted, the company said, by higher commodity prices. What we do not know at the time of writing is whether they see Trump’s tariffs as the main driver of that, but that is more political than anything. What matters is that input prices are rising, and margins are therefore being squeezed. It is reasonable to assume that GM is not the only company in the industry to feel that, so other auto stocks, including Ford, are also indicating much lower opening levels this morning.

That is obviously not good news for those that own stock in U.S. car companies, but the biggest question for investors is whether the declines will remain industry specific or spill over into the broader market. So far, the market is suggesting that it might have broader implications. Futures for the major indices are down, but not massively.

If, however, Ford also comes out with negative guidance this afternoon for the same reason, that could change quickly.

The days of “What’s good for GM is good for America” may be largely behind us, but a negative outlook for the automotive industry as a whole is still a very worrying thing. The U.S. economy is driven more by tech and service industries than traditional manufacturing these days, but, according to autoalliance.org, the auto industry is still responsible for over seven million American jobs.

The simple fact is that you cannot impose a massive tax on the raw materials of production without doing some damage. The President and his supporters believe that that damage will be minimal, short in duration, and lead to long-term benefits accrued from a fairer trade environment for U.S. exporters.

It remains to be seen if that is true but, while GM is just one company, their pessimism could easily become contagious and result in some serious volatility in the stock market in the near future.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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