After the sales of cars and trucks in the U.S. hit a record of around 17.47 million in 2015, the industry had high expectations when 2016 started, only to be hit hard by the “auto sales have peaked” theory. The assumption behind that theory was that, since we were above the 17 million vehicles in a year mark, there wasn’t enough room to go above it; and since auto sales are generally cyclical in nature, we should brace ourselves for the downturn.
As a result, auto company stocks were hammered during the early part of 2016, and then they started moving sideways, but the doomsday scenario never materialized, and we finished 2016 with a record 17.55 million vehicles sold. Now we have to move the “auto sales have peaked” theory to 2017.
The problem with this assumption, which has been adding so much pressure on auto stock performance, is that it completely ignores the possibility of a period of stable sales. As long as the economy is holding its own and not taking the path toward recession, credit is going to be available to the population to buy vehicles. As long as credit is available, people are going to keep replacing their vehicles.
If you look at the light weight vehicle sales chart, you can already see the sideways movement happening – a few months above the 17.25 million mark and a few months below the 17.25 million mark.
I agree that moving too far above from the current level will be difficult. And even if that happens it will be short-lived. At the same time, moving too far down is also going to be difficult unless economic headwinds blow that hard. If the economy is going to turn for the worse, then it's not just the auto industry that is going to be hit.
Unfortunately, the market has punished only the auto companies for a nonexistent economic downturn. The World Bank is forecasting U.S. gross domestic product (GDP) to grow by 2.2% in 2017 and 2.1% in 2018. The labor market tightened a little last month, as claims for unemployment benefits fell to a seasonally adjusted 246,000 for the week ended Jan 28.
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“Increased demand for workers against the backdrop of weak productivity and a shrinking labor pool is starting to put upward pressure on wages, paving the way for interest rate increases from the Federal Reserve this year.
“The labor market is at or close to full employment, and the Fed said on Wednesday it expected labor market conditions would strengthen "somewhat further.A tight labor market is expected to boost wage growth and support the economy through strong consumer spending and the continued recovery of the housing market.” – Reuters
Economic conditions are slowly improving, not going the other way around. But despite all the data to the contrary, auto stocks continue to languish in their depressed state. I don't see the sentiment changing anytime soon. It’s a good time to buy the major auto stocks, but be ready to hold them for a long time before you can see some returns. Until such time you can enjoy the near 5% dividend yield.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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