Daily Gains Letter

Why January Auto Sales Point to Bleak Future for U.S. Economy

By for Daily Gains Letter |

U.S. EconomyDespite assurances from analysts, economists, and central bankers, the U.S. economy isn’t faring so well—and the markets are finally beginning to see what we’ve been warning about in these pages all last year.

For sustainable growth, the U.S. economy needs to be reporting consistently strong fiscals. But it isn’t. For starters, the key stock indices, a reflection of the U.S. economy, have extended their sharp January losses. The S&P 500 is down 5.6% year-to-date, the Dow Jones Industrial Average has lost more than seven percent of its value so far this year, the NYSE is down roughly six percent, and the NASDAQ is in the red by four percent.

Every quarter since the beginning of 2013, an increasingly larger number of S&P 500-listed companies have revised their quarterly earnings lower. During the first quarter of 2013, the number stood at 78%. This time around, 81% of S&P 500 companies have revised their first-quarter earnings lower.

Why the big losses? That depends on whom you talk to. The Bank of America, without even a hint of a smirk, blames the much colder-than-expected weather for the weak U.S. economy, meaning the U.S. economy and global markets are performing poorly because of a snow storm…

I suggest the U.S. economy is doing poorly and the U.S. markets are tanking for entirely different reasons. For starters, the U.S. economy needs steady jobs and earnings growth. Instead, the U.S. economy is facing high unemployment and stagnant wages. For the week ended January 25, jobless claims jumped more than forecast to a seasonally adjusted 348,000.

And a record number of Americans rely on food stamps. Interestingly, for the first time ever, working-age Americans make up the majority of recipients. As expected, U.S. consumer confidence “unexpectedly” declined in January to 80.4 from 82.5 in December.

The ISM Manufacturing Index was forecast to come in at 56.2 in January, down slightly from the 57.0 reading in December. Instead, it came in at 51.3, far below estimates. (A reading over 50.0 indicates expansion, while a reading below indicates contraction.)

Most recently, U.S. auto sales missed their January expectations. Ford Motor Company (NYSE/F) was forecast to report a year-over-year auto sales gain of 2.3%, but instead, the company posted a year-over-year loss of 7.1%. General Motors Company’s (NYSE/GM) expected 2.5% loss turned into a 12% loss. Toyota Motor Corporation (NYSE/TM) was hoping to report a modest loss of 2.7%, but instead, January auto sales were down 7.2% year-over-year. Chrysler Group LLC surprised to the upside with an eight-percent increase in January auto sales from a projected 5.4% gain. (Source: Ro, S., “Auto Sales Missed Big in January,” Business Insider, February 3, 2014.)

The weak U.S. economy goes hand in hand with the expected rise in delinquencies on auto sales loans. Even though auto sales delinquencies have hit their highest levels since the end of 2012, 34% of all U.S. and Canadian bank managers expect auto sales delinquencies to climb further in the next six months. (Source: Wright, L., “Bankers fear car loan and credit card delinquencies,” Toronto Star, January 14, 2014.)

Weather might be one tiny reason why the markets are in the red, but I’ve never known investors to put a month’s worth of weight (and counting) on cold weather in Alabama, Louisiana, and Georgia. The fact of the matter is that the markets are in the red because the U.S. economy is doing poorly and the overvalued stock market is responding in kind.

After a banner year for stocks, a shaky U.S. economy has made more and more investors risk-averse. More conservative investors might want to consider the Guggenheim Defensive Equity (NYSEArca/DEF) exchange-traded fund (ETF), Consumer Staples Select Sector SPDR (NYSEArca/XLP), or the Utilities Select Sector SPDR (NYSEArca/XLU).

Wages are flat, consumer sentiment is down, car sales are down, and car delinquencies are up. For a country that gets 70% of its gross domestic product (GDP) from consumer spending, the future looks bleak.

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