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Detroit auto makers continued to account for the majority of new car sales in September but foreign companies showed the greatest month-over-month improvements.

New vehicle sales, reported by Autodata Corporation, increased 12.8 percent annually in September but fell 7.5 percent on a month-over-month basis. The strong sales reports over the past 12 months, however, pushed the seasonally adjusted annual rate of sales to 14.9 million in September from 14.5 million in August. The improved SAAR has kept auto industry analysts optimistic about the sector's growth.

The month's auto sales report follows improved consumer sentiment in September and increased personal income measures in August.

The Thomson Reuters/University of Michigan Consumer Sentiment Index improved from 74.3 in August to 78.3 in September. The more positive outlook was mainly attributed to gains in stock market assets, increased home values and lower borrowing rates. Increased personal income also added to the strengthened outlook in September.

The Bureau of Economic Analysis' August income report showed a gain of 0.1 percent in consumers' personal income and stated a disposable income increase of 0.1 percent as well.

In September, consumers greatly increased their foreign car purchases resulting in the greatest monthly sales gains for Ferrari, Maserati and BMW which grew sales 29.4 percent, 22.8 percent and 18.2 percent, respectively, in September.

U.S. auto companies slowed sales in September. General Motors (NYSE:GM) accounted for the greatest portion of the month's total sales but sales decreased 13 percent from August and were up only slightly, at 1.5 percent, from a year ago.

Sales for GM were led by passenger cars which increased 29 percent from one year ago. Passenger car sales were the company's strongest product segment in September and will continue to be the company's focus in the near-term, according to Kurt McNeil, GM Vice President of U.S. Sales Operations.

Ford (NYSE:F) accounted for the second greatest portion of the month's sales at 14.7 percent but sales decreased 11.3 percent from the previous month and 0.2 percent annually.

Ford reported its greatest small car sales in September since 2002 at 24,628. The company continues to achieve success in its fuel-efficient product focus which has helped it to gain a competitive advantage among small car manufacturers.

The company's product line currently includes five vehicles that achieve 40 miles per gallon or greater and the marketing team recently reported three new fuel efficient vehicles that would be released for sale by the end of the year.

Of the three U.S. auto makers, Chrysler (FIATY.PK) attained the greatest annual improvement, increasing sales 11.5 percent but reporting a 4.3 percent decrease in sales from August. The company ranked fourth, behind Toyota, for total percent of sales at 11.9 percent.

Passenger cars led sales for Chrysler and were 26.6 percent higher year-over-year. Light truck sales were also up, increasing 6.2 percent from September 2011. Chrysler's Dodge brand accounted for the greatest percent of sales at 33 percent, led by the Dodge Grand Caravan.

Despite sales increases and the improvement in the SAAR, auto industry stocks have continued to lag behind U.S. market returns.

The NASDAQ OMX Global Auto Index has gained 12.8 percent on a 12-month return basis compared to the S&P 500's gain of 34.8 percent.

Ford and Chrysler have fallen short of both benchmarks gaining 7.7 percent and 7.5 percent, respectively, for the 12-month period.

General Motors has led stock returns in the U.S. auto industry sector and outperformed the NASDAQ OMX Global Auto Index on a 12-month return basis but its 23.6 percent annual return still falls below the S&P 500's 34.8 percent gain.

Thus, while vehicle manufacturing and new car sales are contributing to overall economic growth, the auto industry continues to face challenges that negatively affect earnings. Consumers' pre-election spending and the approaching fiscal cliff create headwinds for the industry. Improvements in fuel-efficient product lines and credit availability are strengthening sales for auto makers but the economy's challenges appear to outweigh the industry's opportunity making U.S. total market investments more profitable in the near-term.

Further supporting details on the U.S. auto industry's stock performance and earnings outlook can be found in the table below.

(click to enlarge)

Source: Auto Sector Lags U.S. Equity Market Returns