Wednesday, April 15, 2009

Used car prices: a stock market indicator?

Bespoke came out with an article comparing the chart of S&P 500 with the used car sales prices. They say:

In the second chart below, we compare the used car index to the S&P 500. Regardless of the reason for the spike in used car prices, it has historically tracked US equity markets pretty closely. But based on the chart, the used car index seems to lag the markets at peaks and troughs. However, it's a good sign that the used car price trend is now moving upward instead of downward.

Hmm.. aren’t used car sales counter cyclical?! WSJ seems to concur:

In Tough Times, Auto-Parts Firms Receive a 'Countercyclical Boost'

These stocks have strengthened while most retailers have weakened in a "stretch the family dollar" trade -- consumers, out of necessity, are keeping their autos longer, and electing to get cars fixed rather than trading them in for new vehicles. Those buying cars are increasingly looking to used cars -- about 511,000 used cars have been sold the past three months that in normal economic times would have resulted in a new-car purchase, according to, an auto-information company.

A slowdown in the economy results in more people opting for used cars, which drives up used car sales. (Or at least, used car sales would hold up.) Of course idiosyncratic risks like credit availability, car mileage, gas prices, etc play as much a role in used car (and new car) sales as the economy. I would argue that new car sales and new car prices would be a better predictor to the economy, like this article suggests.

Further, why should used car sales prices track the stock market? The used car prices should track roughly the rate of inflation. The stock market would track the growth in corporate profits, which over the long term, has tended to track the real GDP growth. Thus the nominal stock market return is the real GDP growth plus the rate of inflation.

While I’m sure I’m missing several factors here, the correlation apparent in the chart above probably does not imply causation.Using used car prices(pun intended) to make a case for the equity markets sounds like a stretch to me.