Could Auto Dealers' Anemic Stock Performance Be a Harbinger of U.S. Economic Weakness?

The shares of publicly owned automobile dealers have fallen off a cliff in January, indicating perhaps another ominous harbinger for the U.S. economy in 2016. 

The stocks of AutoNation (AN) , Group 1 Automotive (GPI) , Penske Automotive (PAG) and Lithia Motors  (LAD) began declining sharply in the first week in January. All are trading close to their 52-week lows. 

The group bounced higher in trading on Wednesday, possibly in sympathy with the shares of another dealer chain, Sonic Automotive  (SAH) , which rebounded nearly 6% amid the day's market decline. The previous day Sonic hit a 52-week low, which can be a buy or a sell signal.  

In any event, the growing consensus that 2016 will be a tougher year to sell new vehicles in the U.S. has been a drag on the stock market and the business prospects of automakers, suppliers and their retail dealers. Few indicators better reflect broad economic optimism (or pessimism) than the willingness of consumers to buy a new vehicle, a decision that often entails a multi-year financial commitment. 

Yet signals are mixed: The latest consumer confidence survey from the University of Michigan was positive. Gasoline prices and interest rates are low. 

At the same time, U.S. growth seems threatened due to lower growth in China. With the U.S. automotive sales expansion in its seventh year -- something that hasn't happened in modern automotive history -- consumers may well decide that their vehicle is in good shape and replacing it isn't a priority. Flat or lower auto sales trigger reduced factory activity, layoffs, lower retail sales and a declining gross domestic product. 

Mike Jackson, CEO of AutoNation, said the industry is entering a "plateau" phase following a record of nearly 17.5 million new vehicles sold last year. Automakers told him, he said, that they expect to continue growing this year, which will swell inventories; in his words "a recipe for disaster." 

AutoNation, the nation's biggest vehicle retailer, expects to report lower gross profit for the fourth quarter of 2015, Jackson said, a telltale sign of weaker demand and lower vehicle transaction prices. The company will take steps to shrink inventories and lower costs this quarter. 

Republican presidential candidates have issued dire warnings about the precarious state of the U.S. economy, unremarkable during a presidential election year, though not necessarily wrong. One who doesn't share that view is President Obama; on Wednesday he made perhaps his last victory lap in Detroit at the North American International Auto Show, in order to underscore a vibrant U.S. industry. 

"Today, factories are humming, business is booming, the American automobile industry is all the way back," the president said, a reminder of the U.S. sponsored bailout after the bankruptcies of General Motors (GM) and Chrysler. "Seven years ago sales hit a 27-year low. Last year they hit an all-time high." 

Car dealers won't be the only ones to know before the election of Obama's successor next November whether today's pessimism is well-founded.

 

 

 

Doron Levin is the host of "In the Driver Seat," broadcast on SiriusXM Insight 121, Saturday at noon, encore Sunday at 9 a.m.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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