Auto stocks have been gaining speed ever since Memorial Day as if there's no recession in sight. And maybe, some experts now say, there isn't one.
"The worst is behind us," said Jonathan Smoke, chief economist for Cox Automotive. "And I'm less worried about a downturn unfolding especially in the second half of the year."
New car and truck sales are now expected to hit 15 million in 2023, according to the latest Cox Automotive forecast released on June 27. That would be up nearly 8% from last year when 13.9 million new cars and trucks were sold.
The 2023 forecast now is significantly more optimistic than an earlier Cox Automotive estimate that called for 14.1 million sales of new cars and trucks this year.
Risks for auto sales might have cooled down
Relentless commentary about a U.S. recession being inevitable in 2023 drove many to fear the worst for jobs and Michigan's auto industry. One isn't likely to go out and buy a car if a layoff seems inevitable in a few weeks.
For the first time in more than a year, though, Smoke said he's convinced that the risks of a recession this year are declining.
"I'm optimistic that we will not have a recession, certainly (not) in calendar year 2023," Smoke told journalists gathered for a briefing on the industry at Cox Automotive offices in Troy in late June.
More: Ford sales climb 11% in 2nd quarter, driven by gas-powered trucks, hybrids
Early in the year, he said, three factors haunted the auto industry — the lack of supply on car lots as a result of still depressed new vehicle production; affordability challenges brought on by price inflation and much higher interest rates, and the risk of a recession.
Progress has been made in all three areas, Smoke said.
"We’ve seen big increases in new vehicle deliveries driving higher new vehicle sales without any buildup in days’ supply. We’ve seen affordability not get worse as income growth has been strong enough to overcome modest rate increases. And the odds of recession are diminishing in my view," Smoke said.
The jobs picture has remained strong and consumers are willing to buy. Higher rates are driving some consumers out of the market — particularly subprime borrowers who are looking at double-digit interest rates when buying used cars. But many shoppers appear willing to take on an average new car loan rate of 9%, compared with 6.25% a year ago, Smoke said.
The economy dodged a major blow in early June when Congress reached a resolution to raise the federal government's borrowing limit or suspend the debt ceiling until Jan. 1, 2025. Without such a deal, many economists warned, the odds of a recession would go up.
Many consumers, though troubled by high prices, seem optimistic, too.
The University of Michigan Survey of Consumers, released June 30, indicated that a "striking upswing" in sentiment has taken place with consumer sentiment rising nearly 9% in June from May and up 28.8% from a year ago. Persistent high prices and expenses remain a concern, according to the U-M report, but consumers were increasingly optimistic that the harsh hit of inflation would soften.
Ford and other auto stocks see uptick
Back in July 2022, the buzz kept building around why the economy was bound to tank in 2023, thanks to higher gas and grocery prices, rising interest rates and inflationary pressures on many industries. And auto stocks were taking a beating as recession fears were building.
This summer, auto stocks are looking at double-digit gains from January.
Ford Motor was up 40.4%, adjusting for dividends, from its Jan. 3 close through July 3. Ford closed at $15.24 a share on July 3, up 11 cents from $15.13 on June 30.
General Motors stock, again adjusting for dividends, was up 15.8% from its Jan. 3 close through July 3. GM closed at $38.96 a share on July 3, up 40 cents a share from $38.56 on June 30.
Stellantis stock gained 33.2%, adjusting for dividends, from its Jan. 3 close through July 3. Stellantis closed at $17.81 a share on July 3, up 27 cents from $17.54 on June 30.
On Wednesday, Ford closed at $15.35 a share, up 11 cents or 0.72%; GM closed at $39.42 a share, up 46 cents or 1.18%, and Stellantis had a down day and closed at $17.55 a share, down 26 cents or 1.46%.
Auto stocks are faring well this year, as car and truck sales are improving and profit margins are better, said David Sowerby, managing director and portfolio manager for Ancora Advisors in Bloomfield Hills.
Sowerby said continued demand for higher margin SUVs and trucks is helping fuel profitability, and the number of potential first-time buyers is growing.
Morningstar auto analyst David Whiston said auto sales overall aren't showing signs of across-the-board weakness. Consumers continue to buy cars and trucks with expensive trim levels, driving profitability.
General Motors, for example, reported that second-quarter U.S. sales were up 18.8% compared with the same period last year when supply chain disruptions cut into inventories.
"I’m not expecting a recession to derail auto sales this year," Whiston said.
"Incentives are up nearly double from June 2022 for the industry, per J.D. Power," Whiston said, "but it’s important to remember that’s off a low base a year ago."
Morningstar analysts put their fair value estimate — or what a stock is worth in the long term — for Ford at $19 a share; GM at $78 a share and Stellantis at $42 a share.
Ford's strong share price has put its market capitalization at $61 billion, which is above the $54.89 billion market cap for General Motors.
"It seems absurd that Ford’s market cap is about $6 billion higher than GM’s given GM posts far better margins," Whiston said.
Whiston noted that GM is not far from its 52-week high of $43.63 a share. If the stock market overall doesn't find reason to panic about some challenge, he said, there's a chance that GM could hit that 52-week high in 2023.
Ford's 52-week high was $16.68 and could be within reach, too. "Ford has that chance too," Whiston said, "but it needs to not disappoint on quarterly earnings as it has too many times in recent years."
Much will depend going forward on the jobs picture — and just how limited layoffs end up being across industries as some companies rightsize their operations after earlier hiring sprees and many still deal with continued economic uncertainties.
Economic data points to resilient economic activity, according to minutes of the Federal Reserve Open Market Committee meeting June 13-14.
The Federal Reserve paused and did not raise short-term interest rates at its June meeting after 10 rate hikes since March 2022.
More: Fed raises interest rates for the 10th time: What it could mean for recession concerns
More: Car owners could discover they owe far more than car is worth as sky-high prices fade
The risk remains, though, that banks could further tighten credit, which could hurt some consumers attempting to take out a car loan. Federal Reserve staff, for example, expected in June that tight financial conditions would lead to a "mild recession later this year, followed by a moderately paced recovery."
Any downturn, according to those Fed minutes, "would be neither deep nor prolonged."
No forecast, of course, is a sure bet. Even so, Wall Street clearly likes cars a lot more than last summer when a troubling recession seemed to be right around the corner.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor.
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