Yesterday’s release of US auto sales data by market researcher Autodata Corp. had several layers of stories and implications. From a broad perspective the data confirmed that the US auto industry is recovering. Overall sales were up 11% from last month’s numbers. There were obvious implications for individual companies in the industry and, maybe more importantly, conclusions to be drawn from that and other data from earlier in the year regarding the broader economy.
That 11% jump in overall sales wasn’t unexpected, but it did confirm that after a short wobbly period, new car sales are back on track in the US. The wobbles were indicated by disappointing consumer spending and confidence numbers last week. In the kind of topsy-turvy market action that we have become used to over the last couple of years the market rose on Friday when the lower-than-expected consumer spending numbers were released and fell yesterday when the car sales volume indicated that that may have been a temporary aberration rather than structural weakness in the economy. This once again proves that, in the short term, market sentiment and positioning trump even important backward looking data.
When Friday’s numbers were released traders chose to focus on the Chicago ISM which showed improving conditions in Midwest manufacturing rather than the drop in both consumer spending and confidence. Yesterday, overall jitters about new highs trumped good news in the auto industry. Forget consumer confidence, trader confidence seems to be driving the market. Eventually, though, the overall state of the economy will count and recent data have done nothing to moderate my bullish stance on US equities.
The drop in consumer spending came after the March number was revised up to a full 1%, the largest Month on Month increase since 2009. Following that strength, a 1 month weak number is nothing to worry about. The confidence drop would be more worrying, but seems to be directly contradicted by the increase in car sales. Consumers without confidence are highly unlikely to make a major purchase such as a car, but that is what people are obviously doing. Personally, I place more weight on what people are actually doing with their hard-earned cash than on what they tell a pollster, so I will trust the sales numbers.
There is another, more subtle reason why increasing car sales are a good long term sign. Most people who buy a car take out a loan to do so; those loans have become easier to get and are remarkably cheap. We are all too aware of what happens when borrowing gets out of hand, but some level of consumer debt is needed for growth to pick up over the next year or so. The fact that car loans are available and, more importantly, that consumers are prepared to take them, suggests that even the 3% growth estimates for this year could be beaten with a strong second half. In general, car loans lead and other consumer debt follows.
So the overall indications of yesterday’s auto sales numbers point to good news for stocks. The next question is what do they say about individual companies?
On the surface, it appears that an increase of only 3% is bad for Ford (F), but that is what the company expected, maybe even what they wanted. Truck sales at Ford dropped considerably, but as factories gear up for production of the new F-150 Ford has had problems keeping up with inventory demand. They have reduced or removed many consumer incentive programs as a result which, while it will temporarily harm sales in the US, will lead to a period of higher margins and some pent up demand.
GM (GM) did well with an 11% increase in sales. The recall story, it seems, is of more importance to reporters and politicians than to car buyers. Most buyers are smart enough to realize that the story is unrelated to the new GM models that are driving the growth. The real story at GM is still the rapid shift to more fuel efficient cars that has made the brand more attractive, not just in the US but globally. That trend continues.
The largest area of growth was in the luxury segment, where BMW and Audi were particularly strong. This can be taken one of two ways. Either it is further evidence that the consumer in general is loosening the purse strings or it is more damaging proof that income inequality is alive and well. In reality it is probably a bit of both, but the tendency to spend more for whatever reason has a more direct implication for the broader economy.
Overall, the numbers released yesterday have simply confirmed what I have been saying for some time. Those nervous about new highs in the stock market are ignoring the fact that economic conditions really are improving. Within that improving economy, US domestic auto manufacturers GM and Ford are still trading at a discount to the overall market and still represent decent value. GM in particular has been depressed by short term worry over recalls, making it the most attractive stock in the sector.