The UAW strike is coming. Stocks to buy, sell and watch carefully.

The employment contract between the United Auto Workers and the Detroit-Three automaker expires at midnight Thursday. No agreement has been reached and Wall Street believes a strike is almost guaranteed.

If a strike occurs, investors will need to know what to do with auto stocks. The extended downtime could also impact other sectors and overall economic growth in the United States during the latter parts of 2023. However, navigating all of this doesn’t have to be stressful. There will also be some stocks to buy in the wake of what’s happening.

Keep things in perspective

New UAW President Shawn Fain has a glow for dramatic and literally devastating proposals from Ford Motor (F), General Motors (GM), and Chrysler parent Stellantis (STLA). It’s a bit worrying for investors and is one of the reasons the Street believes some downtime is likely.

Moreover, the strike will have wide-ranging impacts. Large numbers, most in the billions, will be put up daily, but any strikes will eventually be resolved, and most economic activity, such as the production and purchase of new cars, will shift to different months on the calendar.

Cars are important to the economy, but consider that the labor deal between United Parcel Service (UPS) and the Teamsters union affected about 340,000 workers. Less than 150,000 workers are affected by the current negotiations. There is more than 160 million workers in the United States

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Numbers, numbers, numbers

The number of workers directly affected by the strike is small. The overall impact on the US economy is not large either.

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The Anderson Economics Group estimated the cost to the US economy as a result of the UAW strike at approximately $500 million per day. The 10-day strike represents about 0.02% of the total annual US economic output.

Anderson gives the auto industry an economic multiplier of about double, meaning that for every dollar workers don’t spend because of a strike, it will have a $2 impact on the economy from lost wages, production, dealer sales and latte purchases at stores. Starbucks (SBUX). Investors can use this number and the multiplier to track the effects.

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As for automobile companies, General Motors, Ford, and Stellantis have about 40% of the US market share for cars and light trucks. North American production of the trio amounts to nearly $1 billion per day, excluding Sundays. Auto parts companies lost about 0.3% of full-year sales for every 10 days of the strike, UBS analyst Joseph Spaak noted in a report this week.

This is what is at risk for companies. For consumers, reduced auto production means a reduced supply of new vehicles and higher prices for new and used vehicles, as well as higher auto insurance rates. Insurance rates are linked to the value of vehicles.

Insurance companies are in the crosshairs

Rising auto prices represent a headwind for insurers like Allstate (ALL) and Progressive (PGR), JPMorgan analyst Jimmy Bhullar noted in a September report. The problem is that insurance rates lag behind the rise in car prices, putting pressure on profit margins. Bhullar likes both stocks, and is a buy, in part because profit margins have rebounded after the pandemic restricted auto production and pushed up car prices. However, the rebound will be delayed if there is a long strike. Investors may want to wait to see what happens before jumping into auto insurance stocks.

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Why can auto parts stocks shine?

Shares of auto parts producers, which have also been weak in recent weeks, could shine. Aptiv (APTV), BorgWarner (BWA), and Mobileye

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(MBLY) shares have fallen more than 10% on average over the past two months.

UBS analyst Joseph Spak has buy ratings for all three stocks. This is partly due to the recent decline and partly because all three have above-average growth on the horizon due to businesses associated with electric vehicles and self-driving cars.

Why Ford and GM could bounce back

Shares of General Motors, Ford and Stellantis have fallen about 16% from their 52-week highs on average, with most of that decline coming in the past two months as labor rhetoric has intensified. the

Standard & Poor’s 500

Flat over the past two months. They are clearly anticipating a strike.

Now the strike is coming to an end and will eventually be resolved. Many on Wall Street, including Bank of America Securities analyst John Murphy and Morgan Stanley analyst Adam Jonas, point out that automakers’ stocks tend to rebound after the deal is completed. This seems like an opportunity.

It also seems like a reason to avoid Toyota Motor (TM) stock for a short while. Shares have risen about 18% over the past two months. Toyota may be the winner of the strike, but it is a winner in the short term.

Long-term car stocks

However, the bad deal may continue to weigh on shares of Ford, GM and Stellantis. says Wedbush analyst Dan Ives Baron That 5% annual pay increases could put GM, Ford and Stellantis at a competitive disadvantage versus non-union players including Rivian Automotive

(RIVN) and Tesla (TSLA).

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Both auto workers and companies will likely declare victory when the deal is struck. It’s difficult to know exactly how quickly wages will rise. Car deals tend to include pay increases and lump sum payments. Anything that includes a 4% annual increase is good.

Inflation has averaged approximately 4% over the life of the current employment contract compared to 2% over the life of the previous contract. UAW production wages in the 2019 decade were in the range of $32 a share, according to the Federal Reserve. The average hourly earnings in the United States is About $32.50According to the Bureau of Labor Statistics.

Wages must rise, but how much they rise could determine whether GM, Ford and others will be able to effectively fight Tesla for an electric vehicle future.

Write to Al Root at [email protected]

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