Consumers are in a hurry. Some consumer credit stocks could suffer.
Fearing that even a mild recession could materialize later this year or early next year, investors are understandably concerned about the health of the consumer and the businesses that care for them. The strength of the labor market is reassuring for some consumer credit stocks, but not all.
High inflation, which has driven up the prices of big-ticket items and basic necessities, is hitting most Americans. Yet there is a world of difference between consumers who cut spending by about 10% to account for inflation and those who lose their jobs and have to drastically reduce their spending.
So while inflation hurts, unemployment is when “you get into a different ball game,” says Jon Ekoniak, managing partner at Bordeaux Wealth Advisors. With the job market still strong, “we don’t necessarily hear from our clients that they’re trying to scale back significantly at this point.”
He is not alone. Following the encouraging August jobs report,
Chief Economist Jan Hatzius says the US is getting closer to the needle towards a soft landing.
“The best summary measure is our gap between jobs and workers, defined as employment plus job vacancies minus the labor force. It has fallen by 700,000 in the past four months, even after the surprising increase in vacancies in the Job Vacancies and Labor Turnover Survey (JOLTS) report of July,” he notes.
Jobs are unsurprisingly the most important factor in Americans’ spending habits, and that’s unlikely to change given other catalysts are moderating as much of consumer saving in the he era of the pandemic has passed and we are getting some relief on the inflation front.
The particular post-pandemic environment could also help those most at risk of job loss.
“Historically, unprivileged borrowers are the hardest hit by unemployment,” writes
analyst Richard Shane, because they generally have less savings and have a harder time finding a new job. Nonetheless, the big resignation means that jobs in in-person services, from restaurants to healthcare and retail “have been particularly hard hit and continue to see high job vacancies and strong employment… We think these segments could be more resilient should this cycle slow down.”
Taken together, these trends indicate that while many consumers are still hurting and likely to tighten their belts, as evidenced by recent retail results, we are less likely to see a significant drop in spending.
This could be good news for credit card companies, especially in a Goldilocks scenario – with the rising cost of living, consumers may be more likely to use credit cards to make ends meet, but still have the means to pay those bills when they come due. .
“Monthly credit data did not show the early signs of deterioration that we have seen in other sectors,” writes Shane, who prefers
Capital One Financial
(COF), based in part on its popularity compared to other providers, according to its research. He is ostracized
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The larger items are of course more exaggerated, but the trends in the auto finance industry seem to echo what we’ve seen in retail, that wealthier consumers feel much less impacted than those who don’t. who are at the bottom of the income scale.
According to data from Baird analyst Luke Junk met last week, 60-day delinquency rates for auto loans for new cars rose just 6 basis points sequentially in the second quarter, while those Used auto loans jumped 23 basis points to 1.02%.
With the continued uncertainty regarding used car prices, there is likely to be continued divergence on this front. This could be a problem for a company like
(ALLY), with auto financing accounting for nearly three-quarters of its business last year.
That said, even high-income earners feel left out of the housing market, with rising mortgage rates leading to the biggest drop in housing affordability on record.
While homes may not be experiencing pandemic-style bidding wars, the median home price was still up nearly 15% year-over-year in June, and the Federal Reserve looking s committed to raising interest rates further, affordability is unlikely to improve in the near term.
That’s not good news for mortgage originators, who will likely face increased competition for a smaller pool of homebuyers. For his part, Shane has an underweight rating on
Origin point capital
(HMPT), given the headwinds for the group and a relative lack of scale for the business. That sentiment is shared by 30% of analysts tracked by FactSet, and the company’s 2022 consensus earnings-per-share estimate has fallen sharply over the past month.
Write to Teresa Rivas at [email protected]