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When the market's up, we buy cars...

...and when it's down, we don't. That makes no sense, of course: the stock markets are not an accurate reflection of the national economy. They certainly don't reflect our personal financial situations. Which means a clear-headed car buyer shouldn't be swayed by a downturn in the Dow.

But like a snake charmed by flute music, the car consumer appears to be transfixed by movements in the markets. "The strongest correlation to new car sales is the Dow Jones Industrial Average," says Jesse Toprak, an analyst at Truecar.com, a research company that covers the auto business. He was explaining to me why car sales have been down over the last few months - and may not recover for a while.

Edmunds.com Chief Economist Lacey Plache told Marketwatch that most car buyers are going to wait until the economy improves before they buy a new vehicle.

"Stronger buying conditions are telling consumers to go ahead and make their car purchases, but a weak economic landscape is telling them to wait until later this year, or even longer," she said.

In other words, consumers haven't learned that the best way to get a deal is to buy on the dips. That's when there's more inventory available, less demand, and therefore the most room to bargain. That's how Warren Buffett makes money in the stock market, and it's a mantra we hear repeated again and again, on cable TV, and on our own programs at Marketplace. Everybody knows it, so why don't we do it?

Truecar.com's Toprak reckons it's a combination of two, closely linked things: fear and the wealth effect, the combination of which explains why car sales track the Dow so closely. "If people lose ten percent of their worth when the market falls, they're less likely to make a significant purchase," Toprak says. He's not talking about professional investors, who are generally prepared to lose money, and whose spending patterns are usually independent of share prices, especially for short term losses.

The wealth effect, and the market's gyrations, appear to influence not only people who have indirect exposure to the markets, via 401Ks and pensions and the like, but also on people who have no exposure at all. Only 50 percent of Americans are invested in the stock market, even indirectly, but we all get that sinking feeling when the markets tank. "Even if the buyer is hardly invested, when they turn on the TV and see the market, it acts as a green light or a red light to buy," Toprak says.

Toprak acknowledges that none of this makes much sense. Before the steep drop in the markets that followed S&Ps downgrade of US Treasuries a few seeks ago, stocks were sailing upward, without a hint of impending correction, and sentiment presumably was, too. "There's a short-sighted attitude from a lot of consumers," Toprake said. He noted the car-buying American's behavior is affected by two big factors: the stock market and gasoline prices. He recalled last year's spike in gas prices, which stopped the sale of cars for a few weeks, and then the drop in prices which sparked car buying again. "People forgot where the gas prices were at," he said.

Toprak says, intriguingly, that this sensitivity to the markets is almost exclusively an American phenomenon. "Outside the US, car buying is much more based on long-term trends," he said. Toprak comes from Europe where, he says, buyers are much more focused on their personal situation, and tend to ignore the vagaries of the market when making purchases. "When they make decisions, Americans are very short-sighted, compared to all other places on earth," he said.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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