As school loans and credit card debts pile up, investors have less hope for consumers.
Even though the stock market as a whole is still going up, some fund managers are becoming more cautious because of signs of rising buyer stress.
Even though unemployment is still close to all-time lows, the Federal Reserve’s efforts to fight inflation by raising interest rates are starting to hurt families.
Apollo Group data shows that consumer trust dropped more than expected in August, and delinquency rates for credit cards from smaller banks are at an all-time high.
Last week, Nordstrom said that the number of late payments on its store cards is now higher than before the plague. Macy’s, a competitor, said it expects late payments to cut credit card sales by 41% compared to the last quarter.
In October, people will have to start paying back about $1.1 trillion in government student loans. According to a study by TransUnion, this could give them a “payment shock” of $500 or more each month.
Emily Roland, co-chief investment analyst at John Hancock Investment Management, said that the U.S. consumer is on thin ice as 2023 comes to a close. Ahead of the Christmas shopping season in the fourth quarter, she is more optimistic about bonds and defensive sectors like healthcare.
The U.S. economy added 187,000 nonfarm jobs in August, according to data released on Friday. However, the numbers for June and July were changed to show that there were 110,000 fewer jobs created in those months than was previously thought.
Further drops in the job market are likely to be a double-edged sword for investors, easing some inflationary pressures but making it harder for people to spend money.
Jake Jolly, a senior investment strategist at BNY Mellon, said that consumers will “very soon” run out of the extra savings they built up during the pandemic. He is underweight equities and thinks the U.S. economy is headed for a recession.
“It does make me wonder how long consumer spending can continue to surprise to the upside,” he said, adding that bonds continue to look better now that yields are going up and the 10-year Treasury yield is above 4%.
Overall, the growth of consumer spending will slow from 2.3% in 2023 to 0.9% in 2024, according to Gregory Daco, the chief economist at the big accounting firm Ernst & Young. This is because of higher interest rates, fewer savings, and student loan payments. He said the economy will grow slower than usual for a few quarters.
Taking a loss
This week, investors will get a new look at how consumers use credit and a read on the ISM services sector, which makes up two-thirds of the economy.
So far, people who bet against consumer spending have lost. The Atlanta Fed’s GDPNow says that the U.S. economy grew at an annualised rate of 5.9% in the third quarter.
As fears of inflation fade, interest rates are likely to go down in the fourth quarter of this year and through 2024. This will give consumers a break, according to Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management. He expects investors to buy consumer stocks when they go down.
“The U.S. consumer, and the economy as a result, should be pretty strong through 2024,” he said.
The consumer discretionary sector, which includes stocks like Amazon.com, Royal Caribbean Cruises, and Chipotle Mexican Grill, is up nearly 34% for the year so far, which is almost twice as much as the S&P 500 average as a whole.
But the sector needs to catch up lately. Since July 1, it has gained less than 1%, while the S&P 500 has gained nearly 2% in the same period.
Sandy Villere, a portfolio manager at Villere & Co., said that even if consumer spending drops a lot, the strong rally in the sector will likely slow as the tech-driven broader market stalls in the fourth quarter.
So, Villere is putting more money into defensive areas like healthcare that have kept up its pace.
“We think it’s too soon to move away from the consumer right now, but as the Fed’s rate hikes start to take effect, we could see a recession in the first quarter,” he said.
