As Wall Street revels in its fourth consecutive week of stock market gains, the escalating issue of credit card delinquencies looms ominously, hinting at a potential stock market crash. Amidst a seemingly robust month for stocks, the rising tide of credit card delinquencies could signal the end of this financial festivity. The Federal Reserve’s aggressive rate hike campaign appears to be a catalyst for the increase in 30-plus and 90-plus day delinquencies this year.
In the second quarter, the New York Fed reported that 5.08% of credit card balances were at least 90 days overdue, a significant jump from the 3.35% delinquency level in the same quarter of 2022. While not a historical high, the rapidity of this increase could be a harbinger of an impending economic slowdown.
Nicholas Colas, co-founder of DataTrek Research, observes, “Credit card delinquency rates are back to where they were at the end of the last economic expansion, which in and of itself is not worrisome. The speed of that ascent is somewhat disturbing, however, in terms of what it says about the US economy.”
In Q2, U.S. credit card debt hit the $1 trillion mark for the first time ever, leading to speculation that consumers may be bolstering their spending through debt. The anticipated Fed-induced recession, predicted to hit the U.S. in the latter half of 2023, has yet to materialize.
The concern now is that higher interest rates lead to harsher penalties for delinquencies. Credit card interest rates have surged over 40% in the past 18 months. The fear of steeper penalties could force consumers to curb their spending, which would inevitably impact corporate earnings and potentially trigger a stock market slowdown.
Andrew Addison, Publisher and Editor of The Institutional View, warns, “When the percentage of credit-card holders paying their outstanding balances late increases, it historically has foreshadowed an oncoming slowdown. As consumers’ balance sheets become stretched, they cut back on their spending. The cutbacks could be on discretionary items such as restaurants and travel, or essentials such as medicine or food.”
Despite these concerns, stocks are currently performing well. The S&P 500 and Nasdaq Composite have experienced a welcome surge in the second half, thanks to strong macroeconomic data like easing inflation and resilient consumer spending, as well as robust earnings.
As we approach the end of 2023, traders should keep a close eye on delinquencies to gauge the future path of U.S. consumers. With the recent reinstatement of student loan payments, household spending could face a sharp downturn.
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