| PROSPERITY PUB MARKET TALK
Cracks in the Foundation
The American economy is primarily consumer-focused, with consumer spending accounting for just over two-thirds of economic activity.
As inflation has continued raging in the post-pandemic era, and the Fed has embarked on their rate hike campaign, the American consumer — against all odds, and far longer than anyone expected — has been remarkably resilient.
Economic report after economic report indicates consumer spending remains strong. It’s one of the reasons the Fed has cited for not reversing course and lowering rates yet.
But two emerging trends could be the first signs of cracks forming in the foundation of this pivotal part of the U.S. economy: the consumer.
Rising Delinquencies and Debt
The average credit score in the U.S. has dropped for the first time since 2009, signaling that Americans are struggling with debt.
According to a report from FICO, the average credit score fell from 718 to 717.
And while you might want to shrug and laugh off a mere 1 point drop, it is a significant indicator of growing financial stress among consumers — especially when you consider that this is the first drop in nearly 15 years.
Rising debt levels and increased delinquencies are the primary culprits. In October, the delinquency rate for payments 30 days or more past due rose to 18%, a 4% increase from April.
Credit card delinquency rates have also surged to their highest levels in over a decade. New data from the Federal Reserve Bank of Philadelphia shows that by the end of 2023, 3.5% of credit card balances were at least 30 days overdue, marking the highest level since 2012.
High interest rates are making the problem worse, with the average credit card APR now above 21%, making it increasingly difficult for consumers to pay off their balances
.
The Federal Reserve's efforts to combat inflation through aggressive rate hikes have not yet significantly lowered rates on consumer products like credit cards. As a result, more consumers are turning to credit cards to cover rising household expenses, contributing to record credit card debt levels of $1.13 trillion and total household debt of $17.5 trillion.
The Rise of Buy Now, Pay Later
Another factor that could contribute to the consumer debt crisis is the rise of "buy now, pay later" (BNPL) services.
Companies like Affirm, Square, and PayPal have popularized this new form of debt, which allows consumers to make purchases and pay for them in installments.
While this can be convenient for consumers, it also represents a form of debt that is largely unreported and untracked by traditional credit scoring systems. As a result, there could be an a huge blindspot for government and other agencies that track consumer debt.
If the consumer were to finally to crack under the weight of mounting debt and delinquencies, it could unleash an unprecedented tidal wave of financial instability.
The surge in delinquencies and the widespread use of BNPL services suggest that many consumers are already over-leveraged. If a significant number of debtors become unable to meet their obligations, it could trigger a chain reaction that affects the broader economy.
While it might not seem like a problem at the moment, these are exactly the kinds of issues that blow up and end up creating new regulation, as happened in the aftermath of the Great Financial Crisis.
In the meantime, there are some tradable opportunities in the Buy Now, Pay Later space.
Our own Jeffry Turnmire tells us that Square (SQ) is trying to break out above his proprietary Roadmap Line.
A definitive close on SQ above about 77.50 could see a run to near 95. See Jeffry’s SQ chart here.
Meanwhile, he tells us PayPal (PYPL) is entering a Measured Bounce setup. A definitive daily above his Roadmap Line, say near 64 could see the stock go on a run as high as 83. See Jeffry’s SQ chart here.
— The Prosperity Pub Team
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