Auto sales to give insight on consumer health
reckless lending. “It’s not fraudulent, but people are up to their neck in debt,” he said. “Default rates are going to be much more significant.”
The stock market is taking note. The S&P 1500 automotive retail index is down 6.5 per cent year to date, with Advance Auto Parts, AutoNation and Sonic Automotive down double digits in 2017.
Carmax, which reports earnings on Thursday, is seen as a bellwether in the used-car industry. Its stock is down 8 per cent so far this year.
Another red flag from the sales floor: The average number of days a new vehicle sat before being retailed hit 70 in the first 19 days of March according to a note from JD Power and LMC Automotive. That is the highest since July 2009.
With the market tightening, industry insiders expect more price cuts.
“The competitiveness of the industry continues to be evident in everrising incentive levels,” said Deirdre Borrego, Senior Vice President of automotive data and analytics at JD Power in a note.
“Incentives will reach a new high for the month of March.”
At the same time, competition to fi- nance loans is likely to further increase credit risk for auto lenders, Moody’s Investors Service said this week. Ally Financial stock fell 9.6 per cent in March.
Even the challenge to General Motors this week from a hedge fund, aimed at boosting a lagging stock price, reflects the concern that the industry is hoarding cash without significant prospects for growth.
The market for autos, however important, is not as big a part of the US economy as the housing market was when its collapse in 2008 triggered the sharpest recession since the Great Depression.
However, and taking into account all the moving parts of the industry’s supply chain, a halt in the auto sector could strain an economy that is already eight years into a recovery cycle. And it would hurt blue-collar workers the most.
If a jump in auto loan defaults materializes, there is also the risk that consumers will shut their wallets and hurt economic growth, two-thirds of which depends on consumer spending.
“When you look at how consumers are spending there is a question mark if the less-than-prime buyer is suddenly having issues,” said Ian Winer, head of equities at Wedbush Securities in Los Angeles.
“The spillover effect is: What other industries are also using rather aggressive financing in order to get revenue — Jewellery and mattresses jump out at me as two big examples.”
Tempur Sealy shares have fallen 32 per cent year to date.
Wall Street fell on Friday, pulled down by Exxon and JPMorgan Chase as investors wrapped up a strong quarter and weighed whether corporate earnings reports will justify the market’s lofty valuations.
Major indexes have hit multiple record highs since the election of President Donald Trump on bets that he would improve economic growth by cutting taxes and boosting infrastructure spending. The rally has also benefited from robust economic data and a pickup in corporate earnings growth.
For the quarter ending on Friday, the S&P 500 gained 5.5 per cent, its strongest quarterly performance since the last quarter of 2015. Investors are now looking to the upcoming quarterly earnings season to justify pricy valuations.
First-quarter earnings for S&P 500 companies are expected to rise 10.1 per cent, according to Thomson Reuters I/B/E/S. The index is trading at about 18 times earnings estimates for the next 12 months, compared to its long-term average of 15.
The Dow Jones Industrial Average fell 0.31 per cent to end at 20,663.22 points, while the S&P 500 lost 0.23 per cent to 2,362.72. The Nasdaq Composite slipped 0.04 per cent to 5,911.74.
The S&P 500 posted 18 new 52week highs and one new low; the Nasdaq Composite recorded 100 new highs and 17 new lows.