August 5, 2024 — The world’s economy looks much different than it did last Wednesday.

Overnight, Japan’s Nikkei 225 stock index plunged more than 4,400 points – 12.5% – the biggest drop since 1987, forcing a suspension of trading.

The Nikkei’s Monday decline follows a series of troubling economic news in the U.S. at the end of the week. We’ll stay out of the economic weeds here, but at a high-level, news driving the decline over the last couple of days include:

1. Weaker than expected economic growth reported on Thursday.
2. 4.3% unemployment rate report on Friday.
3. The Bank of Japan, the country’s central bank, raised interest rates to 0.25% last Wednesday to strengthen the yen against the U.S. dollar, which likely contributed to Thursday and Friday’s selloff in the U.S.
4. And in other concerning news: The world awaits Iran’s response to Israel’s assassination of Hezbollah’s leader last week, raising concerns a Mideast war could erupt any day.

The news destroyed the excitement the market displayed on Wednesday following indications from the Fed that it may begin cutting interest rates in September. Thursday began a massive selloff of shares that continued through Friday, and into global markets as they opened Monday.

Now, the market wonders whether the Fed waited too long and as a result, pushed the economy into a recession.

Analysis Monday morning has been all over the proverbial map. Some experts are calling for an emergency rate cut before September, while others are urging to “stay cool,” and let the unwinding work itself out this week.

Public dealer groups felt the whipsaw of the news cycle as four of the six groups share prices hit their all-time highs last week driven by better-than-expected earnings for some, and renewed market confidence of a pending September rate cut.

But the news Thursday and Friday pushed share prices down (although, Group 1 Automotive, Lithia & Driveway, and Penske Automotive Group are up slightly over last week’s open – see chart).

Historically – at least since 2013, share prices for the public six groups have been remarkably volatile, but the rebounds out of the so-called dips have always ended up higher than previous highs (Lithia being the outlier the last couple of years, trading about $100 less than its high in 2022 – our analysis, it’s returned to a more rational price).

Below are other insights from recent news on the automotive front:

• New-car inventory issues (days supply far exceeding industry averages) are limited mostly to Stellantis, Ford, and GM. Other brands seem to be navigating the “return to normal” dynamic from a production standpoint.

• Early trend of customers returning to smaller vehicles (sedans, CUVs) and away from trucks and larger SUVs – mainly due to pricing of the latter getting too high.

• While affordability is an issue (mostly for SUV/truck market), the industry will sell approximately 16 million units this year (just a million off the pre-pandemic years). This in an environment where “experts” are complaining about affordability, and OEMs have yet to get aggressive on leasing or incentives, and high interest rates. It will not take much for sales to reach pre-pandemic levels of 17 million units.

• Getting reports on the ground of a spike in used vehicle wholesale prices the last several days (including a $4k jump in an offer from Carvana for my 2019 Odyssey from last month).

• We’ll likely see higher SAAR in July and August as dealers continue to work through the paperwork resulting from the CDK cyber-attack.

• We’re going to see headlines of dealer buy-sell activity dropping (Automotive News ran one last week with the word “Fizzling”). The truth is, activity will likely normalize to what it was during the years 2013 to 2019. Meanwhile, prices being paid, although coming down, are still higher than 2019.

• Still no word of Solera’s pending IPO – I expected it last week. But with the market massacre the last couple of days, we’ll see whether Vista Equity postpones it or pulls it off the table.

• Although news of massive selloffs in both the U.S. and global markets raise concerns of another 2008-2009 scenario, markets have shown the ability to absorb such news since those years.

For dealers, the approach today should be the same as it has been:

• Don’t get underwater on used car inventory. Wholesale prices continue to be volatile and driven by activity in your local market. Be nimble and willing to cut potential losses quickly.

• Stay aggressive on the marketing front. The temptation will be to pull back, cut advertising expenses. But in uncertain times, dealers who are creative, take rational risks, and aggressively market, while being ruthless on process, are the ones who tend to capture market share (and not lose their shirts doing so).

Be smart on which brands to invest in. Understand what the potential minefields are from a manufacturing perspective; which brands are well-capitalized; and whose leadership treats dealers as partners or as pawns (there are a couple of brands today whose troubled relationships with their dealers have yet to be reported).