Google “October surprise”, and the top results will all reference the political aspect.
For example, from Wikipedia: “… a news event deliberatively created or timed or sometimes occurring spontaneously to influence the outcome of an election …”.
From Kavanaugh, to caravans, to Khashoggi, to pipe bomb parcels, this October had more than its share.
But, October is also known for surprises in the stock market. In fact, statistically speaking, it is the market’s most volatile month.
And, since many of the big movements have been to the downside (for example, October 29, 1929 — aka Black Tuesday; October 19, 1997 — aka Black Monday; and, of course, the financial collapse of 2008), October is also the second-worst month in terms of performance.
So, here, too, this October did not break tradition — a 1,500-point decline in the Dow over two days, several 500-point swings within a single day, and seven of 11 S&P sectors moved into correction territory.
There are several theories as to the cause for greater market volatility in October, and the reason for October political surprises is obvious. The more important question is do these “events” have lasting importance for the economic outlook. The answer is “yes.”
Elections have consequences regardless of what have may impacted vote totals or margins. And equity markets impact, as well as reflect, the real economy.
Thus, it is fortunate that we entered this November with exceptionally strong fundamentals; the lowest unemployment rate in half a century, the first 12-month period of GDP growth above 3 percent since 2005, rising income and wealth for middle-income households, and continued growth in corporate profits. And fundamentals for the used-vehicle market are even better than those for the overall economy. But this came as no surprise.
All analysts knew that used vehicles would outperform new vehicles this year. And, indeed, they have. In the third quarter, the publicly-traded dealership groups posted another increase in same-store retail unit volumes (it was the 36th time out of the past 37 quarters), strong average selling prices, stable gross margins, and, of course, a rising used-to-new sales ratio.
These trends likely continued in October — and should do so for the remainder of the year. After all, jobs and credit always have been — and always will be — the driver of used-vehicle demand, sales and profits.
But “surprises” happen in months other than October, and we can see many possibilities percolating: China (a managed economy too big to manage), the European Union (a failure to fix decade-old financial fissures) and emerging markets (several of which are collapsing as result of internal politics, trade shifts or exchange rates).
The U.S.-centric used-vehicle market can temporarily escape the shocks of these international events, but not the aftershocks if they reverberate through our economy.
Of more immediate concern to the used-vehicle market is the shifting U.S credit market.
Chairman Powell has purposely clouded future guidance. And rightly so. The need for flexibility increases as confidence in the consensus outlook declines.
And, as Powell recently stated, “Common sense suggests we should beware when forecasts predict events seldom before observed in the economy”. He was referring to the Fed’s own forecast which foresees the unemployment hold belong 3 percent for the next three years while inflation stays within the Fed’s 2 percent target — a scenario last played out over 65 years ago, and then only for a brief period.
My bet is that credit markets will recoil in 2019 and the Fed backs off. Dealers should expect some tightening, but nothing that can’t be dealt with if they remember the basics: get some more upfront money if possible, manage customer expectations and build strong relations with multiple lenders.
What would be another surprise in the coming months? No surprises.
Tom Webb is the former chief economist for Cox Automotive, Manheim, and NADA. He can be reached at firstname.lastname@example.org and on Twitter: @tomwebb1950