Investors lower outlook for consumers as student loans, credit card debts pile up
Signs of rising consumer stress are causing some fund managers to be more conservative in their forecasts, even as the broader stock market continues to rise.
As unemployment remains near historic lows, the Federal Reserve’s inflation-fighting rate hikes are beginning to weigh on budgets.
About $1.1 trillion in federal student loan payments will resume in October, potentially giving consumers a “payment shock” of $500 or more a month, according to a study by TransUnion (NYSE:).
“The US consumer is on thin ice as we head into 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 holiday shopping season in Q4.
The US economy added 187,000 nonfarm payrolls in August, slightly above expectations, while the unemployment rate rose to 3.8%, the Bureau of Labor Statistics said on Friday. The government has significantly lowered its previously released estimates for June and July job growth.
Further contractions in the labor market are likely to be a double-edged sword for investors as they ease some inflationary pressures while weighing on consumer spending.
Total consumer spending rose slightly more-than-expected in August, while the savings rate fell to its lowest level since November 2022, the Commerce Department said on Thursday.
Consumers will use up their excess savings accumulated during the pandemic “very soon,” said Jake Jolly, senior investment strategist at BNY Mellon (NYSE:) Investment Management, which is underweight equities and expects the U.S. economy to be headed for a recession .
“The real question is how long can consumer spending surprise on the upside,” he said, adding that bonds continue to look more attractive amid yield growth that has risen to over 4%.
Overall, consumer spending growth will slow to 0.9% in 2024 from 2.3% in 2023, 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 see below-trend growth for several quarters.
Investors will get an updated overview of consumer credit usage next week and an overview of the ISM services sector, which makes up two-thirds of the economy.
Betting against consumer spending has been a losing bet so far. The US economy continues to grow at an annual rate of 5.9% in the third quarter, according to the Atlanta Fed’s GDPNow estimate.
Interest rates are likely to fall throughout the fourth quarter of the year and into 2024 as inflation fears ease, giving consumers some cushion, said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, who expects the Investors notice any setbacks in consumer stocks.
“The US consumer, and therefore the economy, should remain quite resilient well into 2024,” he said.
The consumer discretionary sector, which includes stocks like Amazon.com (NASDAQ:), Royal Caribbean (NYSE:) Cruises, and Chipotle Mexican Grill (NYSE:), is up nearly 34% year-to-date, nearly doubling like that as a whole.
Still, the sector has lagged lately, gaining less than 1% since July 1, while the S&P 500 is up almost 2% over the same period.
Even if consumer spending falls significantly, the sector’s strong recovery is likely to fade as the overall tech-driven market slows in the fourth quarter, said Sandy Villere, portfolio manager at Villere & Co.
As a result, Villere is adding to positions in defensive sectors like healthcare that are not lagging behind.
“We believe it’s premature to move away from the consumer now, but we can expect a recession in the first quarter as the Fed’s rate hikes begin to take hold,” he said.