Auto Stocks Are Down. They Could Be a Great Recession-Recovery Play.

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Automobile and components stocks in the S&P 500 tend to surge after the start of a recession.

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Jeff Kowalsky/AFP via Getty Images

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Automobile stocks have gotten hit particularly hard this year, and while it is difficult to know the right time to buy, their eventual rebound is likely to be strong.

General Motors (ticker: GM), Ford Motor (F), Stellantis NV (STLA) and Aptiv (APTV), which makes parts for cars, are down 45%, 44%, 36% and 45%, respectively for the year. That is worse than the S&P 500‘s
19% drop.

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A big concern driving their losses is consumer spending. Already-problematic inflation has prompted the Federal Reserve to ratchet interest rates higher, threatening to put the economy into recession.

This all means that, when the economic outlook improves, these stocks should be stellar performers.

Generally, when the economy re-expands, economically-sensitive, or “cyclical” stocks like autos see their profits rise quickly. Demand rises, sending sales higher, while profits often gain even faster because much of these companies’ costs are fixed.

Automobile and components stocks in the S&P 500 tend to surge after the start of a recession. On average historically, these stocks drop for the few months leading into a recession, according to Morgan Stanley strategists. And then, they rise almost 50% from its start to about a year after.

There is one caveat, though. The stocks could still struggle for the near-term before the potential recovery.

The Morgan Stanley strategists noted last week that auto stocks are among the top candidates out of all sectors to see continued downward revisions to earnings estimates. Plus, historically, their gains don’t pick up until a few months after a recessions starts. The jury is still out on when the next one will begin.

That view isn’t unpopular, either.

When it comes to picking up these stocks now, “it’s really early to make that call,” says Christopher Harvey, equity strategist at Wells Fargo,
“These are names we will tell people to avoid.”

So maybe now isnt the best time to buy, but that time is drawing nearer.

Write to Jacob Sonenshine at [email protected]

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Credit: www.marketwatch.com /

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