Rising Debt Levels Could Impact Consumer Stocks

Critical consumer trends could influence long-term stock activity

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Nov 18, 2017
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Since the mid-1980s, credit card debt has posted near-exponential growth rates, and this has led many economists to speculate on the likely impact this will have on the long-term financial markets. To be sure, limited abilities in consumer spending can reduce the outlook for corporate earnings -- and this can be a primary indicator of corporate earnings results in the quarters and years ahead.

With the S&P 500 and the Dow Jones Industrials consistently trading at record highs. This is significant, as it could ultimately signal an end to the current bull market if these trends become too problematic, according to data compiled by Discuss Economics.

If you are a long-term investor, this means that proper portfolio diversification across industry sectors remains critical. But it also means that specific stock sectors (i.e. consumer stocks) could be most severely impacted if there is a clear influence made in overall GDP growth and in household spending levels.

From a monetary policy perspective, changes in consumer credit growth may not be as extreme if the Federal Reserve remains tentative in its measures to raise interest rates.

This would be a negative for stock names like Visa Inc. (V, Financial) and Capital One Financial Corp. (COF, Financial).

But it would be much more of a positively for benchmarks like the Dow Jones and the S&P 500. These are factors that will need to be considered by investors with a long-term time horizon.

Looking at the numbers, the chart above shows the changing trends that have been in credit card debt and household income over the last 35 years. The discrepancies here are stark, and there is little reason to believe that these trends will be changing any time soon. Over this period, household incomes have made only modest gains on a comparative basis.

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What this does is limit purchasing power and, by extension, corporate profits for many stock selections in key sectors. Central bank policy will remain critical, as any major changes in interest rates will only exacerbate these trends and make the climate more challenging for those that are currently invested in the main stock benchmarks.

Will these trends continue? So far, this remains to be seen but they will continue to have a dramatic underlying influence on the markets and ultimately favor some stock sectors over others. The Federal Reserve holds many of the cards here and it is up to investors to watch the ways credit markets unfold so that it becomes easier to position in equities over the long term.

Disclosure: The author has no position in any stock mentioned.