A Sign Of Industry Recovery Or Economic Pivot?

With the end of the pandemic, there has been an end to the copious amount of money printed that was injected into the markets. As we now face high interest rates along with inflation, the heavy spending has started taking a toll on buyers’ pockets and the worry on the minds of many is, where is the economy headed and are there any clues on what to expect? 

During the pandemic, the car sector took on a front seat role in the overall strength of the economy. Carmax (NYSE: KMX) – a major used car retailer founded in 1993, operating across the entire USA – started its 2020 with a hefty 63% drop, with the “official start” of the Covid-19 pandemic in March 2020. Whilst the S&P 500 (CME:ESU23), trailed behind with a 32% drop. 

Along with the majority of the economy, Carmax ended up recovering throughout the year, surprisingly closing with a 7% gain in stock price. Riding the momentum, the company’s stock closed with another positive year in 2021 with a 37% increase in its shares – hitting all-time highs in November of 2021- along with other car industry players and the economy following similar growth.

The natural question that proceeds is, can Carmax be an indication of what can be expected to come in the major economy or is it a lone wolf? 

Due to the global supply chain issues that started in 2021 due to the pandemic, followed by the invasion of Russia on Ukraine in 2022, backlog on new cars held back sales. The demand for both used and new cars purchased, caused scarcity in inventory, pushing up prices. Towards the end of 2021, the automotive industry started feeling the effects of the supply chain issues, and demand started to taper with the continuous interest rate hikes by the central banks. 

November of 2021 became a pivoting point for Carmax – along with the rest of the car industry – going from an all-time high, down to revisit the previous lows of 2020, with a 66% drop. In the same time frame the S&P 500 for example, only dropped about 19%.

Curiously enough, even without a slowdown of purchasing overall across different markets, the pre-owned car market has been more vulnerable than other sectors of the economy in the past. But since the start of 2023, Carmax has been turning around, with a 40% growth in stock price. One would think that the higher interest rates would scare consumers away from acquiring new auto loans or they’d simply not be getting approved. Anticipating this, to get ahead of the curve, Carmax has taken steps to lower used car prices and attract buyers.

The turnaround for Carmax now brings forth debate amongst market participants; is Carmax going to diverge from the rest of the economic sectors, continuing to push up its stock price? Or is the recovery in stock price a simple retracement of the pending drop in the economy that many predict will bring a recession?

While used vehicles may have been the first to have taken a toll on their sales, it is strongly believed that Carmax has a bright future. Due to the fact that Carmax has taken action to adapt to the ever changing consumer demands, new trends, and poor market conditions. With a looming recession on the horizon, the fear of inflation, high consumer debt and interest rates staying up, could Carmax be giving some foresight? Let’s see how the continuous price drops in vehicle prices develop over the remainder of 2023.