Investors lower outlook for consumers as student loans, credit card
debts pile up
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[September 01, 2023] By
David Randall
NEW YORK (Reuters) - Signs of rising consumer stress are prompting some
fund managers to grow more conservative in their outlooks, even as the
broad stock market continues to rally.
While unemployment remains near historic lows, the Federal Reserve's
inflation-fighting interest rate hikes are starting to weigh on
households.
Consumer confidence fell more than expected in August, while delinquency
rates among credit cards issued by smaller banks are the highest on
record, according to data from the Apollo Group.
Department store Nordstrom said last week that delinquencies on its
store cards are now higher than pre-pandemic levels. Rival Macy's said
it expects late payments to reduce credit-card revenues by 41% from the
previous quarter.
Payments on approximately $1.1 trillion of federal student loans will
resume in October, potentially setting consumers up for a "payment
shock" of $500 or more each month, according to a study by TransUnion.
"The U.S. consumer is on thin ice coming into the final stretch of
2023," said Emily Roland, co-chief investment strategist at John Hancock
Investment Management. She is more bullish on bonds and defensive
sectors like healthcare ahead of the fourth-quarter holiday shopping
season.
Economists polled by Reuters expect data due Friday will show the U.S.
economy added 170,000 non-farm jobs in August, down from the 187,000
jobs added in July.
Further declines in the labor market will likely act as a double-edged
sword for investors, relieving some inflation pressures while weighing
on consumer spending.
Consumers will "very soon" exhaust their excess savings built up during
the pandemic, said Jake Jolly, senior investment strategist at BNY
Mellon, who is underweight equities and expects that the U.S. economy is
on the path toward a recession.
"It does beg the question of how long consumer spending can surprise to
the upside," he said, adding that bonds continue to look more appealing,
given a rise in yields that has pushed the 10-year Treasury yield above
4%.
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A street sign marks Wall Street outside
the New York Stock Exchange (NYSE) in New York City, where markets
roiled after Russia continues to attack Ukraine, in New York, U.S.,
February 24, 2022. REUTERS/Caitlin Ochs/File Photo
Overall, consumer spending growth will fall from 2.3% in 2023 to
0.9% in 2024, said Gregory Daco, chief economist at accounting giant
Ernst & Young, due to higher interest charges, fewer available
savings and student loan payments. He said the economy will post
below-trend growth for several quarters.
Investors will receive an updated view of consumer credit usage and
a reading of the ISM services sector, which accounts for two-thirds
of the economy, next week.
Betting against the consumer spending has so far been a losing
wager. The US economy continues to grow at what the Atlanta Fed's
GDPNow estimates is an annualized 5.9% rate in the third quarter.
Interest rates are likely to fall over the fourth quarter of the
year and into 2024 as inflation fears ebb, providing some cushion
for consumers, said Jason Draho, head of asset allocation Americas
at UBS Global Wealth Management, who expects investors to buy into
any dips in consumer stocks.
"The US consumer, and therefore the economy, should remain fairly
resilient well into 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 to date, nearly double the gain of the
S&P 500 index as a whole.
Yet the sector has lagged lately, gaining less than 1% since July 1
while the S&P 500 is up nearly 2% over the same time.
Even if consumer spending does fall significantly, the strong rally
in the sector will likely wane as the tech-driven broader market
slows over the fourth quarter, said Sandy Villere, a portfolio
manager at Villere & Co.
As a result, Villere is building up his positions in defensive
sectors such as healthcare that have not lagged.
"We think it's premature to move away from the consumer now, but we
can see a recession hitting in the first quarter as the Fed's rate
hikes start to kick in," he said.
(Reporting by David Randall; editing by Megan Davies and Andy
Sullivan)
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