Record Debt and Credit Scores Boost Financials

Achieving a perfect 850 credit score is the Sisyphean effort to grasp a budgetary grail rarely seen in the hallowed halls of credit agencies. While just 1% of Americans have currently scaled Mount Olympus, almost half of adults have a lofty 715 or higher score. Boomers and older generations average about 750 while the 42 and under crowd has moved up to the 690 range. Debt continues to soar, but consumer delinquencies are merely back to the excellent credit year of 2019 when bankers were a happy lot. With the COVID handout continuing to stimulate excessive demand and full employment, we have learned to ignore the whopping $10 trillion in new Federal Government debt since 2020 and appreciate the handouts and tight labor market. The rising credit scores have enabled loan approvals and a sense of financial optimism among bankers and customers. Inflation and higher borrowing rates have curtailed consumption rates back to pre-COVID norms, but this a good setup for the soft or no landing recession crowd.

Americans have been wielding their credit cards with vigor. In 2022, the purchases on credit and debit cards reached a staggering $10.4 trillion, with just over a trillion in carried credit card debt.  This may appear to be a scary trend, that we are drowning in debt, but in fact we are waltzing with our liabilities. Total household debt and checking accounts have risen in tandem by roughly $3 trillion since COVID began, but our assets have ballooned by $20 trillion. Wealth jumped by 80% since 2019 for adults under 40. Bank of America reports that checking account balances for the younger cohort of customers remains elevated while older, richer clientele have reduced their account size to take advantage of 5% savings rates and roaring tech stocks. With all of the above trend consumption since 2020, Americans have actually improved their financial balance sheets and locked in mortgage rates we can only dream about today. The efficacious credit scores and routine delinquency rates attest to the health of most American consumers and their adroit credit card utilization ballet. Now that inflation, minus shelter, has already achieved 2% normalcy, interest rates should gently ease in Q2 and help pave over the cracks that remain. 

The charging consumer credit wave has been ringing up gains for credit card and financial companies, other than banks. A correction is due as rates rise short term, but blue skies are still in the forecast.

The warp and weft of producers and consumers still requires more supply to meet decelerating demand.  This is a tailwind for banks who are still wandering the wilderness waiting for falling interest rates and more evidence the economy will fly past the soft landing airport. When consumption rates normalize at lower growth rates long enough for labor market slack, then banks will be bargain basement stocks to own for a lower interest rate environment. Before we get there, the Fed has a headwind of a stronger economy with risk of rising inflation that prevents the multiple rate cuts the investment market has priced in. Watch for 10 Year Treasury rates to stay elevated in the 4.2 to 4.5% range until mid-March, before falling closer to 4% in April. Banks will move with Bond prices and inversely with yields. Lower rates this spring will give Banks a bounce in their step, but the strong economy may keep this sector in a trading range for another 6 to 12 months.

As our report last week highlighted, February 9th should mark the Q1 momentum top in the stock market from which a topping pattern was due prior to the first market correction in 4 months. Today’s worse than expected CPI report and 2% drop in equities may be confirmation of our expected momentum top.



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