Market Commentary

• A recent tally of all forms of U.S. consumer debt totaled $18.6 trillion.
• While it is true that total consumer debt has reached a record high, we think it is a good idea to try and dig a bit deeper to get a better view of what this number really means.

As we approach Christmas and the holiday gift-giving season, news media across the board have been reporting that consumer credit-card debt has topped $1.2 trillion, a record high. Another statistic that garnered a lot of attention over the past month or so tallied up all forms of consumer debt (mortgage loans, auto loans, credit cards, student loans, etc.) and came up with a total of $18.6 trillion, also a record high per New York Federal Reserve data. Many of these media reports implied that this level of debt meant that consumers were stretched and in poor financial condition.

While it is true that credit-card and total consumer debt have reached record highs, it is a good idea in our view to look under the hood and try to dig a bit deeper to get a better view of what these numbers really mean. It helps to compare the current level of consumer debt to an appropriate benchmark rather than looking at the absolute number in a vacuum. If you look at the ratio of household debt to disposable income, the current reading just below 90% is close to the lowest level in at least the last 25 years according to Bloomberg data. The only periods where the ratio was lower were in the early months of the COVID-19 pandemic and the 18 months from the start of 2021 through June 2022. The highest level, near 135%, came in late 2007 just before the Great Financial Crisis gripped markets.

What’s more, we wrote recently in this weekly piece that the consumer economy was bifurcated. In other words, some consumers have been doing rather well in the current economy (high wage earners) while others were struggling (those at the lower end of the income scale). A portion of our unfavorable rating on the Consumer Discretionary sector is tied to lower-end consumer headwinds.

Think of it this way: Consumers at the lower end of the income scale spend a much higher percentage of their income on basic necessities like food and shelter. They have far less extra income to spend on discretionary items like vacations, cars, and dinners at restaurants than those at the higher end of the income spectrum. While discretionary spending is normally skewed toward these higher-income earners in a typical economic cycle, this time around wages for those at the lower end of the income scale have not kept up with the pace of inflation and the skew or divergence has increased meaningfully. This means their buying power has gone down as prices have gone up. “Affordability” has recently become a big news headline.

So, debt is a big number, but we should look past that for perspective. What’s more, mortgage debt is not extreme right now, and credit-card delinquencies have risen only modestly. It appears younger borrowers and those at the lower end of the income scale have been the most affected. But overall debt balances continue to increase with income, and top earners continue to spend. We believe tax refunds next spring should lead to consumer-spending growth.

We do see the economy improving as we move through 2026. Artificial-intelligence (AI) related capital expenditures and deregulation should also positively affect a number of different segments of the economy.

Forecasts are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players, reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment.

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