What is the market telling us?

Jan. 1, 2020
The Chicago Board Options Exchange Market Volatility Index (VIX) is a key measure of market expectations for near-term volatility, constructed using options prices on the S&P 500. While the VIX is well off a recent high of 48.20 reached on May 21

The Chicago Board Options Exchange Market Volatility Index (VIX) is a key measure of market expectations for near-term volatility, constructed using options prices on the S&P 500. While the VIX is well off a recent high of 48.20 reached on May 21, at 28.58 currently (June 14), implied market volatility is still well within levels seen during the crash of 2002 and 2003.

Investor uncertainty remains palpable, as fears of European sovereign debt issues, financial regulatory reform, and potential slowing in the global macroeconomic recovery continue to ripple the market surface. On a year-to-date basis, our BB&T CM Aftermarket Equity Composite is +11.9 percent and just -2 percent since the market high of April 23, 2010 (and subsequent decline), handily outperforming the S&P 500’s performance of -2.3 percent and -10.5 percent, respectively. Certainly a portion of the relative outperformance has stemmed from investor aversion towards owning riskier asset classes, evident in the flight to the US dollar and recent US Treasury yield compression.

Yet over this same time period our aftermarket composite has even outperformed some of the most traditionally defensive equity sectors, including consumer staples and utilities. As such, we also attribute a large portion of the aftermarket equity outperformance to investors revisiting the favorable secular fundamentals which generated such robust growth in 2009 – and which we believe will continue to positively impact results over the balance of 2010. Industry demand trends appear to have slowed somewhat in May from what was a very strong showing in March and into April, likely on account of non-fundamental issues (weather, deferral, income tax rebates), but seem to be picking up again in June.

While Polk data revealed the first contraction ever seen in the U.S. motor vehicle population in 2009, we maintain our view that the PARC will recover (and expand further) as broader macroeconomic conditions gradually improve. But we also continue to believe that a cautious outlook with respect to a significant, near-term recovery in new vehicle sales is prudent. According to Autodata Corp. (and the WSJ), through the first five months of 2010 fleet sales are up 32 percent while retail sales to individuals have increased just 13 percent. As would be expected, new vehicle sales are impacted by a number of variables, including consumer confidence, employment conditions, and incentives, among others. Consumer confidence has moved higher, employment seems to be stabilizing, and manufacturer incentives abound.

In our opinion, though, a large part of the issue continues to stem from limited access to credit - just not so much for borrowers in the prime and near-prime categories. According to data from CNW Marketing Research, auto loan application approval rates for prime and near-prime borrowers have essentially recovered to pre-financial crisis levels (currently in the low-90 percent and mid-80 percent range, respectively). For sub-prime borrowers, however, the situation is drastically different. Auto loan application approval rates for sub-prime borrowers are currently running only in the low teens. To put this in perspective, in 2006 and 2007 nearly two thirds of all sub-prime loan applications received credit approval.

GM executives have indicated that rebuilding a captive finance arm (recall that GM sold most of its stake in GMAC last year) is critical to a successful completion of the company’s highly anticipated IPO. While too early to tell, a potential recovery of new vehicles sales in the U.S. to the 16-17M level of years past may very well hinge on the ability of sub-prime borrowers to borrow once more. Until then, the fleet is aging, and independent garages are busy doing what they do best – meeting the needs of America’s motoring public.

About BB&T Capital Markets:
BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive Aftermarket. BB&T Capital Markets is a division of Scott & Stringfellow, LLC NYSE/SIPC. Scott & Stringfellow is a registered broker/dealer subsidiary of BB&T Corporation, one of the nation’s largest financial holding companies with $166 billion in assets.

Sponsored Recommendations

Best Body Shop and the 360-Degree-Concept

Spanesi ‘360-Degree-Concept’ Enables Kansas Body Shop to Complete High-Quality Repairs

ADAS Applications: What They Are & What They Do

Learn how ADAS utilizes sensors such as radar, sonar, lidar and cameras to perceive the world around the vehicle, and either provide critical information to the driver or take...

Banking on Bigger Profits with a Heavy-Duty Truck Paint Booth

The addition of a heavy-duty paint booth for oversized trucks & vehicles can open the door to new or expanded service opportunities.

Boosting Your Shop's Bottom Line with an Extended Height Paint Booths

Discover how the investment in an extended-height paint booth is a game-changer for most collision shops with this Free Guide.