• Most projections for a stock market decline hinge on a weakening US consumer.

• Bearish investors cite $1 trillion in bank card debt, upcoming student loan payments, and a depletion of excess pandemic savings.

• Nonetheless the US consumer has a great deal of capability to spend, and that’s great news for the stock market.  

From $1 trillion in bank card debt to the upcoming restart of student loan payments, there are a lot of reasons to be concerned regarding the financial health of the US consumer.

And other people concerns are getting louder and louder as some stock market strategists forecast an imminent end to the bull market, partly due to a weakening consumer who’s expected to slow spending.

But some perspective is required, especially amid a heightened period of scary headlines that include a record high in bank card debt and the depletion of excess savings that were built up through the pandemic.

Truly, US consumers have a great deal of firepower left to spend money, grow the economy, and drive the stock market higher. Here’s why.

1. Low debt-service ratio

While $1 trillion in bank card debt appears like quite a bit, what really matters is whether or not or not consumers pays down those debts. They typically most definitely can.

Lower than 10% of a US households’ disposable income goes towards debt payments, which includes mortgages, auto loans, and bank card liabilities.

That’s below pre-pandemic levels and below the ten%-12% range that was consistent for much of the 2010s, when stocks were remarkably strong.

2. Consumer assets dwarf liabilities

While consumer debts are on the rise, so too is the value of consumer assets — and the two are really not comparable.

The collective net price of US consumers currently sits slightly below $150 trillion, and total assets are nearly $170 trillion, with much of that in homes and stocks. Meanwhile, consumers have total debts of slightly below $20 trillion, with nearly all of that represented by mortgages.

And consider this: while bank card debt grew about $100 million from pre-pandemic levels to easily over $1 trillion, US consumers’ total net price increased by about $30 trillion from pre-pandemic levels.

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3. Home equity an untapped source of funds

US homeowners have built up nearly $30 trillion in home equity, and they’ve yet to tap into it via home equity lines of credit, as shown throughout the chart above. Outstanding home equity lines of credit are nowhere near their peak seen through the 2008 recession.

Utilization rates for home equity lines of credit are at 38%, which is well below the pre-pandemic average of 51%.

Home equity lines of credit represent an easy path for homeowners to borrow money against their house, normally at a lower rate of interest than personal loans. The vast sums of money that buyers have tied up of their homes represent optionality, allowing them to borrow the money down the road. That’s a wide range of firepower that may support further spending and growth for the economy.

4. Average consumer has low mortgage rates locked in

Mortgage rates have surged over the past yr to levels which have sparked an affordability crisis for brand latest home buyers, nevertheless it’s vital to remember the massive majority of homeowners locked of their mortgages at historically low rates.

The effective rate of interest for outstanding mortgage debt is just 3.60%, barely above a multi-decade low. So as difficult since it is for brand latest home buyers given the surge in mortgage rates to above 7%, it won’t have as chilling of an effect on the economy as some think.

5. Retail spending is solid with a great deal of cash-on-hand

All of the hard data shows a consumer which will withstand just just a few hiccups, like a restart in student payment loans. That’s validated by monthly retail sales data, which has shown resilient growth this yr. And as the customer keeps spending, their pile of cash continues to be growing.

Money market funds currently have nearly $6 trillion in money, a record, as investors profit from 5% risk-free rates. While just a few of that cash pile is owned by institutions, consumers command an infinite chunk too.

Altogether, US consumers are on solid footing with room to proceed their spending habits while on the an identical time servicing their debts. And provided that consumption makes up about 70% of GDP, this strength should proceed to flow through to the economy and stock market. So don’t count out the customer just yet.

Read the unique article on Business Insider