Summer Markets: Uncertainty Ahead, but May Holds the Key

The Manheim Used Vehicle Value Index fell to 205.9 in mid-May, a 4.4% increase year-over-year but a 1.1% decrease from April, signaling a potentially softening used car market after strong appreciation in April. Luxury vehicles and SUVs led year-over-year gains, while EV prices, though up 2.0% year-over-year, slipped 2.0% month-over-month; overall wholesale supply remained flat, and consumer sentiment data showed a decline with rising inflation expectations.

Analysis

The U.S. used vehicle market is exhibiting signs of cooling in mid-May after a period of robust appreciation. The Manheim Used Vehicle Value Index, at 205.9, while 4.4% higher year-over-year compared to the full month of May 2024 on a seasonally adjusted basis, reflects a 1.1% non-adjusted decrease in wholesale prices from April in the first half of May. This depreciation is stronger than the typical 0.3% decline historically observed for the full month of May. Although seasonal adjustments indicate the market remains stronger than typical for this period, the deceleration from April's significant gains is notable, and analysts project more normalized wholesale pricing trends through Q2 as the influence of earlier tariff changes diminishes. Segment performance reveals divergence: luxury vehicles (+6.6% YoY) and SUVs (+5.5% YoY) led year-over-year gains, whereas compact cars (-1.2% YoY) declined. Compared to April, all segments experienced price drops, with compact cars (-1.9%) and trucks (-1.7%) recording the largest decreases. Electric vehicle prices present a mixed scenario, increasing 2.0% year-over-year but falling 2.0% month-over-month, underperforming non-EVs which were up 4.2% YoY and down 1.5% MoM. Wholesale used-vehicle supply remained flat at 24 days as of mid-May, consistent with late April figures and one day lower than May 2024, slightly below long-term seasonal averages. Adding to market uncertainty, consumer sentiment has weakened, as evidenced by the University of Michigan’s preliminary May automotive retail data falling 2.7% to 50.8, alongside worsening inflation expectations, with 1-year forecasts rising to 7.3% and 5-year forecasts to 4.6%.

Key Decisions for Investors

• Investors should closely monitor the pace of used vehicle depreciation and sales conversion rates, as the market appears to be transitioning from recent strong appreciation towards more normalized, albeit still supply-constrained, conditions.
• The deterioration in consumer sentiment, coupled with sharply rising inflation expectations, constitutes a significant headwind for auto demand; these macroeconomic indicators warrant careful observation for their potential impact on discretionary spending.
• Portfolio strategies should consider the varying performance across vehicle segments, noting the continued year-over-year strength in luxury vehicles and SUVs versus the declining values in compact cars, and pay attention to the month-over-month price volatility in the EV segment.