The Latest Numbers On Debt Don’t Add Up

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Key Takeaways:

• US households, across categories, are taking on increasing, if not record amounts of debt. 
• Scary situation, however, to this point, they’re doing a pretty good job paying it back. 
• As an investor, look to relatively high-end, stable stocks if you think the bottom’s going to fall out on debt. 

Here’s where it gets really confusing. On debt. Something seems like it’s gotta give. If all hell does break loose, The Juice has a super straightforward idea for you. 

But first, the seemingly contradictory numbers, via the New York Fed’s Q2 report on household debt and credit released the other day. 

Source: NY Fed

• Total household debt hit a record $16.15 trillion in Q2, up $312 billion (2%) from Q1. 
• Credit card debt increased $46 billion between Q1 and Q2. It’s up 13% year-over-year, the most dramatic increase in 20 years. 
• Mortgage balances are up $207 billion and home equity lines of credit by $2 billion, quarter-over-quarter. 
• Other debt balances, primarily retail cards and other consumer loans, increased by what The Fed calls “a robust” $25 billion. 

The Fed attributed the increasing debt loads to the increased cost of pretty much everything. 

Makes sense. And suggests we could be headed for trouble.

However, other data from the same report enters confusion into the conversation: 

• Credit scores on new mortgage lending remain high, at a median of 773. So, banks appear to be acting responsibly on that front. This isn’t 2008. 
• Across timeframes, delinquency rates were unchanged between Q1 and Q2. 
• The share of debt balances that were severely derogatory declined to 1.1% in Q2. 
• 2.7% of all outstanding debt was at some stage of delinquency in Q2, which is two percentage points lower than it was in Q1, 2019. 

All sounds good. 

The only kernel of concern – debt balances that are 30 days late increased in Q2. Maybe this is the writing on the wall. Maybe not. Too soon to tell. 

It could be that the struggling cohort of consumers are cutting back on discretionary purchases and using debt responsibly to get by. And they’ll pay it all back – over time – without much issue. 

Or the bottom’s about to fall out. You made your minimum credit card payment in June, but missed in July or you’re not so sure about August. 

Time will tell. 

The Bottom Line: In the meantime, what to do, as an investor, if all economic hell breaks loose thanks, in part, to a debt implosion? 

This is the relatively easy part. 

If you’re concerned and want to play it safe, stay away from relatively unpredictable names such as Uber and Airbnb. While they’re not necessarily bad long-term investments, particularly Airbnb, they bring another layer of uncertainty into an already uncertain economic situation. 

Stick with names that have proven they can weather the storm. 

Starbucks might be one, thanks to its loyal consumer base. 

Apple’s (AAPL) definitely another. The company’s recent earnings report drives this point home. If you’re a long-term investor, Apple could be a portfolio staple. However, as our sister newsletter, The Spill, notes, Apple’s growth trajectory at the moment might not be impressive enough. 

Then there’s Costco (COST). Since The Juice suggested looking at the stock in early June, it’s up roughly 11.5%. You can attribute this strength, in part, to Costco’s relatively affluent and resilient customer.

In fact, Costco has outperformed Target (TGT) and Walmart (WMT) over the last six months. The retailers that have crushed Costco stock during this time – Dollar General (DG) and Dollar Tree (DLTR). The Juice put both of these stocks on your radar in late May. 

Source: Google Finance 

What a way to play this dichotomous economy whose bottom might be about to fall out – AAPL and COST on the high end. DG and DLTR on the low end.

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