New Record Low In Monthly Auto Sales

Better Q2 GDP Predictions

When COVID-19 first started spreading in America, Q2 GDP estimates imploded. Investment banks and economists were all rushing to lower their guesses as quickly as possible. In some respect, every estimate is partially a guess, but this situation implied much more guessing was done because of the record dispersion in predictions. Now that 1 month from the quarter has passed, the estimates have started to come closer in line and are likely more accurate. 

Predicting Q2 GDP growth is still tough because the difference between opening the economy in mid-May versus early June can mean multiple percentage points of GDP growth. To be clear, it’s not as simple as that binary choice implies. States are opening slowly. Also, business doesn’t suddenly start booming when the economy reopens. However, any type of improvement will likely be huge on a rate of change basis.

(Click on image to enlarge)

The table above shows the projections for Q2 growth. Let's throw out the Bloomberg estimate. That makes no sense. It must be using old data. Even the Atlanta Fed GDP Nowcast, which only uses official data, expects -16.1% growth. That’s likely too high because not all the data from April is out yet. However, once all the data from April comes out, it might be too low because May and June should show improvement since the economy will be partially opened by then. 

Headline GDP growth won’t matter as much as intra-quarter growth. That’s because we already know Q2 growth will be the lowest of this recession. The question is how fast the economy recovers from the weakness in March and April. We will find that out when the data from May and June comes out.

Stocks Probably See A U Shaped Recovery

Obviously, we know that the stock market has soared much higher. To be clear, the initial rally was justified because the final decline was caused by a liquidity crisis. Stocks probably should have fallen less. On the other hand, there are always liquidity issues when the market is crashing. A main question is if the current stock market is pricing in a V-shaped recovery or if it’s just pricing in increased visibility.

It's possible that the market is expecting a U shaped recovery. Uncertainty has fallen. However, if the recovery takes a few months longer than expected and we still don’t get a vaccine or treatment in the meantime, stocks can selloff. We won’t revisit the low, but we could see a 10% decline. We saw 7% moves in single days in this bear market, so that’s not horrible. 

Personally, I won’t predict another big decline because I don’t have recency bias or see a depression coming. This recession is unlike any of the others we have seen, but it’s not a depression. It’s an extremely sharp dip in activity that’s mitigated by government intervention. We can expect the stimulus and Fed support to prevent lasting damage. Congress might give out another $1,200 stimulus check which would help a lot.

Record Low In Auto Sales

We just had record low auto sales. That’s quite impressive (in a negative way) because the data goes back to the mid-1970s when there were much fewer people in the country. Auto sales fell from 11.4 million to 8.58 million in April which beat estimates for 7.1 million. The lowest estimate was 5 million. The economy shut down, making it surprising there were that many cars sold. 

We are in such an extreme environment that record low sales surprised to the upside. It's surprising that there were this many sales. In fact, I’m from NYC where there was hardly any economic activity in April. Sales fell below the great financial crisis’ trough and below any natural disaster that we experienced in the past few decades. This was a nationwide natural disaster. Domestic vehicle sales fell from 9 million to 6.8 million.

(Click on image to enlarge)

This report signals retail sales will have the biggest yearly decline ever. It will be interesting to see how bad it was from a historical perspective. The unemployment rate is in the high 20s and the people who have disposable income can’t spend it because they are locked down. Even if they had money and weren’t locked down, the business shutdowns make it tougher to spend money. You can see the weakness in the auto market by looking at Ford and GM stock. They are down 48.41% and 44.49%. 

Tesla is a huge outlier as the stock is up 68.58% in 2020. Once again, may are very bearish on Tesla stock because of its valuation and flamboyant CEO. Elon Musk’s social media popularity can sell cars, but it’s a double-edged sword because he can offend people. His downplaying of COVID-19 has undoubtedly hurt his reputation. Plus, cheaper gas makes it very uneconomical to buy an electric car.

Consumers Are Spending Money Somewhere

It’s not all gloom and doom for retail. Home improvement related stocks and retailers are having a great spring. As you can see from the chart below, consumer search activity for home improvement is spiking. People are staying home more which encourages more improvements. It’s a task to keep busy. 

You can see from some of the stocks how well the industry is doing. Scott’s Miracle-Gro stock is up 19.86% year to date. Another example is Home Depot which is up 1% year to date which is way better than the retail sector which is down 21.48% year to date.

(Click on image to enlarge)

Conclusion

Q2 GDP growth is going to break records. It will be the worst quarter ever. I think we will see terrible results even if the economy significantly recovers in June. However, stocks will rally strongly if the results do improve next month. No investor cares about the records. That’s for the economists to discuss. 

Investors are worried about the rate of change of the economic improvement. We will likely see a jagged U shaped recovery. It’s jagged because of the different timing of states opening. Auto sales were the worst ever in April. April retail sales report will be so bad, it will be like looking at a car crash. One of the few bright spots in retail is home improvement.