The Dow just hit a record high. The Fed continues to pull off its impossible balancing act, to the relief and applause of Wall Street. What could possibly go wrong?
Maybe nothing.
I don’t claim to be an expert. All I know is that historically, market crashes are not gradual or slow. The chasms are preceded by peaks. For years I was of the opinion that there was such collective competency and political will invested in keeping the stock market healthy that any correction would be temporary — à la 2022.
That is still what I think, actually.
But I think we are going to have one, and this is why.
Delinquency rates and charge-offs on consumer loans are at a ten year high.
If you look at the Q3 numbers — particularly for credit card debt — the trend is even more striking. The problem is that the consumer debt sector (which does include credit cards, but does not include mortgages) is not exactly tiny. Various estimates put the consumer credit market around $7.84 trillion for 2022, compared to $10.23 trillion in commercial loans for the same year.*
Credit cards have in the past been a profit center for banks, but higher interest rates make it more difficult for consumers to keep current on payments. How big a problem is this? It’s difficult to know for certain because risk exposure varies so much from bank to bank. The costs of maintaining brick-and-mortar branches in nearly every zip code are not trivial. For everyone except for small businesses that do a high volume of cash transactions, their presence is not necessary on a day-to-day basis.
My guess is we’ll see a major retail bank either merge or fail in 2024. Not the end of the world. But it will cause some ripples.
What is more concerning is that in this tightrope act with our money supply, we may have found ourselves on the wrong side of the consumer demand curve. Simply put, households who have maxed out all their available credit (and who won’t be getting relief from falling interest rates any time soon) can’t keep the economic cycle going.
To give just one example, Ford is cutting its production of F-150 “Lightning” trucks in half. Maybe consumers just aren’t ready for EV trucks. Maybe they are priced too steeply. Or maybe… just maybe… their target audience is having trouble getting a loan.
So if innovation can’t sell trucks for Ford (F), where is it generating value?
The most highly valued company in the world is a consumer product company.
To put it another way, Apple (AAPL) stock is at an all-time high, but how many people do you know who just sprang for the latest iPhone? Q4 sales figures will tell that story.
Just remember to subtract the three percent of credit card holders who are currently in default from your sales projections. Do that again for the next quarter. And the next.
Interest rates can and will keep inflation tamped down. Stock values aren’t real until you sell. I’ve been alarmed by how little volume and human activity I’ve been seeing on the trading sites. The meme stock and options traders have mostly moved on.
Historically, the market reaches its highs this time of year. If you need your mutual fund proceeds sooner rather than later, maybe think about shifting some of your reserves into cash. I know that isn’t standard financial advice, but with money market and CD returns at over five percent, you are paying a high premium for uncertainty.
* For those who care about such things, the federal debt is at $33 trillion.