We are now in the second year of the pandemic, and the classic car market is holding up as well as anyone could have expected. While live auction sales are still down in the first quarter of 2021 compared to the same period in 2020, online auction sales have nearly doubled. The rise of the virtual marketplace has been great for the stock market, cryptocurrencies, and just about any company that delivers goods or services to your door. Where would we be without the internet?
The economy’s horizon, however, is never without its share of dark clouds. Market watchers say the 40-year lull in U.S. inflation rates could soon be disrupted amid central bank mandates, stimulus spending, stalled globalization and other market factors. The value of the dollars in your pocket could fall as government gets bigger, Fed policy tightens, wages and taxes rise, and debt shifts from households to the public sector.
“We believe a secular turning point for both inflation and interest rates has arrived,” Bank of America investment strategists wrote in a strategy paper focused on collectibles and published in late March. Producer prices rose 1 percent in March and spiked 4.2 percent over the last year. The prices of goods, meanwhile, skyrocketed 7 percent. These trends could accelerate amid hot post-pandemic demand and lingering constraints on supply. As GDP is poised to sizzle at potentially the highest annual rate since 1983, economists say inflation will be right alongside it in the frying pan.
What should car collectors do to prepare, particularly if inflation becomes more than just a transitory blip? Remember, long-run spikes in inflation are killer if you’re feeding a family on a fixed income. You can only swallow rising milk and gasoline prices for so long before you go asking for a raise or picking up a side hustle.
Its impact on the collector car market, however, isn’t as cut and dry. We generally don’t have reliable data on collector car values from the last era of major inflation in the United States, the ’70s and early ’80s, but we do know how other tangible assets—namely art—performed. Generally, they did well. Sales of high-end collectibles “dry up most” during recessionary periods, according to a recent study by Deloitte; however, they can be, if anything, more attractive during periods of inflation.
Consider the advice given by the well-known investor James Sinclair in 1978, a year preceding two consecutive years of double-digit inflation: “Intuitively, collectors, whether passive or not, know that the value of tangibles invariably rise during periods of inflation because what they want costs more each day,” he told the New York Times. “When inflation becomes institutionalized…the collectibles that tend to appreciate the fastest are portable and private.”
Indeed, collectibles were not just a cautionary play during the inflationary ’70s and early ’80s—they were engines for profitable growth when yields were otherwise hard to find. Anita Heriot, president of Pall Mall Art Advisors, said real assets like jewelry, paintings and watches represented a solid bet in that era. In the 1970s, when economic “stagflation” was king, Bank of America said real assets far outperformed popular financial instruments like blue chip stocks, government bonds and cash. In contrast, growth in the art market has been lackluster during periods of low or no inflation.
“The only asset that is a hedge is an asset that will hold its value, and ultimately increase its value,” Heriot said. While sensitive to economic cycles, artwork and other “passion assets” that can be seen, touched, or driven hold value because they are popular and scarce at the same time.
That doesn’t mean any classic car (or painting or watch) will hold its value during a period of inflation. Hariot notes that plenty of trends in the art world could go bust, and the same holds true for segments of the car market. Conventional wisdom says the best inflation strategy is to hang on to the tangible assets that you have, and look for ways to acquire more at attractive prices. Just be sure those assets—whether parked in the garage, sitting in a vault, or hanging on a wall—have underlying intrinsic value. If you feel something is overvalued, now might be the time to sell it and grab something a little more stable.
Overall, though, demand for collectibles like art and cars is expected to outstrip supply for years to come, thanks to the number of collectors emerging from the millennial crowd and the expansion of online selling platforms. If inflation takes hold, car enthusiasts might be joined by investors looking for real assets.