CarMax and Lithia Stocks Trade Up, What You Need To Know

What Happened?

A number of stocks jumped in the afternoon session after comments from a key Federal Reserve official boosted investor optimism for a potential interest rate cut. 

New York Federal Reserve President John Williams, a voting member of the rate-setting committee, suggested he sees room for "further policy easing," which sent a strong signal to the markets. Following his remarks, the probability of a December rate cut, as measured by the CME FedWatch Tool, surged from 39% to 71%. Lower interest rates can stimulate the economy by making borrowing cheaper for both consumers and businesses, which often translates to increased consumer spending. This prospect is outweighing recent reports of lower consumer confidence, as investors bet that a more accommodative Fed policy will support retailers through the holiday season.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.

Among others, the following stocks were impacted:

• Vehicle Retailer company CarMax (NYSE:KMX) jumped 5.8%. Is now the time to buy CarMax? Access our full analysis report here, it’s free for active Edge members.
• Vehicle Retailer company Lithia (NYSE:LAD) jumped 5.9%. Is now the time to buy Lithia? Access our full analysis report here, it’s free for active Edge members.

Zooming In On Lithia (LAD)

Lithia’s shares are somewhat volatile and have had 12 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The previous big move we wrote about was 28 days ago when the stock gained 4% on the news that the latest Consumer Price Index (CPI) report showed inflation at 3.0%, fueling investor optimism for potential interest rate cuts. 

The CPI, a key measure of inflation, came in slightly lower than consensus forecasts on a month-over-month basis. While the 3.0% annual rate remains above the Federal Reserve's 2.0% target, the market-friendly data prompted a rally, with the S&P 500 and Nasdaq hitting record highs. For consumer-facing industries, moderating inflation and the prospect of lower interest rates are significant tailwinds. These conditions can translate into greater disposable income and improved consumer confidence, encouraging spending on non-essential goods and services. As a result, sectors like retail, travel, and automotive are seeing renewed investor interest, as they are well-positioned to benefit from this potential increase in consumer appetite.

Lithia is down 13.3% since the beginning of the year, and at $302.48 per share, it is trading 23.3% below its 52-week high of $394.27 from November 2024. Investors who bought $1,000 worth of Lithia’s shares 5 years ago would now be looking at an investment worth $1,032.

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