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Worried About the Economy? Auto Sales May Say Otherwise

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November 17, 2015
Get an economic health update about the auto industry.

Concerns about how a Chinese slowdown or a Federal Reserve interest rate hike could impact economic growth continue to swirl in financial markets. But investors looking for detailed clues about the internal health of the U.S. economy may need to simply fix their stare on monthly auto sales.

In October, the pace of car sales surged to a seasonally adjusted annual rate of 18.23 million, well above industry economist expectations for a 17.7 million rate. The October number beat September's pace of 18.17 million and marked the first time since early 2000 that the sales pace exceeded 18 million for two months in a row.

New Car Smell

According to industry analysts, it's been a perfect storm for most U.S.-based auto companies this year—in a positive way. A stronger labor market, a relatively healthy dose of consumer confidence, and low crude oil prices have unleashed pent-up consumer demand and encouraged buyers to step onto car dealership lots. Increasing numbers are driving away in a new set of wheels.

That’s in part because the average age of American cars on the road recently hit an industry record at 11.5 years, according to auto industry figures. Americans hung onto to those vehicles longer post–Great Recession.

This change in new car demand is not only positive for auto manufacturers; it’s also potentially a positive sign for the economy overall.

"A car is the second most expensive purchase by the average American family. Surging car sales have positive implications for overall consumer spending," says Sam Stovall, managing director at S&P Capital IQ.

Financing incentives and zero or very low interest rate loans have been another driving factor behind the strong pace of car sales, notes Stovall, which should hold true for some time if the Fed sticks to its plan for go-slow interest rate changes.

The need to replace aging vehicles could keep auto sales elevated in the coming months and years, Stovall argues. "The outlook is still favorable for the majority of auto manufacturers because the average age of the autos is at a record high. Consumer confidence remains elevated and interest rates will remain attractive even if the Fed hikes rates,” he says.

In for the Long Haul or Just a Spin?

As traders assess this outlook, including its risks, there may be both investing and trading opportunities in auto and auto-related stocks. "You have to decide if you’re going to be a long-term investor or a shorter-term trader, then you have to consider if you think this auto-buying trend will continue not only in the U.S., but worldwide,” says JJ Kinahan, chief market strategist with TD Ameritrade.

For the trading crowd, there are a number of factors to monitor, Kinahan says. "There seems to be a correlation between the sliding price of crude oil and pent-up demand for cars. People are not only buying cars, but some aren't afraid to buy bigger cars and SUVs,” he says.

Traders looking at auto stocks may want to consider:

  1. Monitoring the price of crude oil
  2. Tracking the monthly jobs report
  3. Following monthly auto sales data

From there, TD Ameritrade clients can compare auto and auto-related stock performance using the “overlay tool.” For example, figure 1 shows a daily, one-year chart with Ford Motor (F), General Motors (GM), and CarMax (KMX). 

Auto stocks chart

FIGURE 1: HIGH-PERFORMANCE VEHICLES? To use the overlay tool, log in to the thinkorswim® platform. Go to the Charts tab > input a single symbol (our sample here is F) in top-left box > click Studies in the upper-right corner > Quick Studies > Compare With > Custom Symbol > input “GM” and repeat “studies” steps to add symbol “KMX” to the chart. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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