Why investors are staying put as strikes hit U.S. automakers

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The strike by the United Auto Workers union against General Motors GM-N, Ford F-N and Stellantis STLA-N arrives at a time when the Detroit-based car makers are trying to expand their electric vehicle offerings and compete with Tesla. The timing is one thing that is possibly making investors nervous right now.

The labour action began soon after midnight on Sept. 15, and entails – so far – rolling work stoppages at select U.S. plants rather than a wholesale walkout by all autoworkers. Some analysts expect the action could have a significant impact on the three companies.

“In this crucial period of EV execution, model roll-outs, distribution, marketing – and with EV competition rising across the board – the timing could not be worse,” Dan Ives, an analyst at Wedbush Securities, said in a note.

Ford expects that if the union wins this battle and secures wage increases as high as 40 per cent, then the company’s total compensation will be double what workers earn at Tesla. That raises concerns that traditional automakers will operate at a significant disadvantage at the cusp of an expected upsurge in EV production over the next several years.

But if recent history is any guide, stocks caught in the middle of a strike are hardly worth abandoning during these bouts of uncertainty: While share prices can react in the short-term, the effects of labour conflict tend to blow over relatively fast as larger issues – such as economic activity – take over.

The Big Three automakers offer early examples of this trend. Ford’s share price is roughly unchanged since the strike action began last week. Over the same period, GM’s share price has fallen by about 1 per cent and Stellantis – whose brands include Chrysler, Jeep and Dodge – is up more than 4 per cent.

In all three cases, the stocks performed better than the S&P 500, which has fallen more than 2 per cent since the strike began, and even Tesla TSLA-Q. This outperformance is likely because forecasters continue to see robust vehicle output over the longer term, even if there is a dip in September.

According to Wells Fargo WFC-N, citing updated data from S&P Global, a staggered UAW strike strategy lasting five weeks will hamper light-vehicle production in North America for 2023 to the tune of 315,000 vehicles. Yet the production forecast for 2024 increased by 468,000 vehicles.

To be sure, these are early days for the strike and Ford reached a tentative deal with Canadian union Unifor on Tuesday, making forecasts of any sort little more than guesswork. But the stock market’s reaction so far is hardly unusual given the historical record in recent decades.

Fundstrat Global Advisors last month looked at nine of the largest U.S. labour strikes affecting publicly traded companies over the past 20 years, including Boeing Co., Verizon Communications Inc. and Goodyear Tire and Rubber Co. GT-Q

The research firm analyzed stock returns over a period encompassing the three months before the strike began to the three months after it ended, and compared these returns to the sectors in which the companies operate. Whether a stock lost ground over this period, or underperformed the sector, was essentially a coin toss.

“The sample size used in this brief inquiry is too small to come to any substantive conclusions, and we have not controlled for a number of potentially confounding factors. Nevertheless, it seems that a major work stoppage need not spell disaster for a company’s stock performance, on an absolute or relative basis,” Fundstrat concluded.

A lengthy strike against Boeing Co., from September to the start of November, 2008, offers one of the more upbeat examples of how labour strife can have little apparent direct impact on a stock. Over the course of the eight-week strike – including three months before and after – Boeing’s share price slumped 41.3 per cent, according to data from Bloomberg.

But that dismal performance occurred during a particularly rough patch for the stock market during the 2008 financial crisis: The S&P 500 fell 38.3 per cent over the same period, and the industrials sector fell a steeper 44.2 per cent, making Boeing’s labour challenges look moot over the short-term.

And longer-term investors should take note: Boeing’s return over the next five years, including dividends, outperformed the S&P 500 by about 85 percentage points, suggesting that the labour conflict did not hurt investors.

It’s a point that investors might want to consider as labour conflict heats up following a quiet period after the COVID-19 pandemic arrived. Investors may be on edge, but they are not rattled.