Pay Attention To This Warning On The Economy

The divide between Wall Street, the relatively affluent and the lower rungs of Main Street has never been more evident. At least not since The Juice has been keeping score. 

Let’s piece together more elements of a story that has been developing over the last year or so. 

The Looming Credit Card Bubble

Starting with last week’s word from deep discount store Dollar General (DG) that it’s lowering 2023 guidance for same store sales and earnings per share. In the press release where Dollar General provided details alongside a weak Q1 earnings report, the company said:

While the macroeconomic environment has been more challenging than expected, particularly for our core customer, we are confident in Dollar General’s ability to deliver strong growth in the years ahead, despite the near-term pressure which impacted our first quarter sales results and is anticipated to impact our full-year sales and EPS.

We emphasized our core customer there because it’s important. Even though they’re both categorized as “discount stores,” Dollar General’s customer base is generally much less affluent that that of, say, Costco (COST), which tends to attract six figure earners. Even though DG and Dollar Tree (DLTR) both say they’re seeing more high-income shoppers thanks largely to inflation, you’re more likely to see the financially strapped in their aisles. 

That said, if the Dollar General customer is cutting back even more, things might be getting even scarier, especially for those struggling to make ends meet. 

Tie DG’s warning to element number two: steadily increasing credit card debt. The Juice updated this developing story last month. 

As big banks continue to keep cash in reserve to protect themselves against bad debt, consumer debt continues to grow exponentially: 

And the latest data from the Federal Reserve shows that we’ve hit another record on revolving debt. It grew by $17.6 billion in March, hitting an all-time high of just under $1.24 trillion.

Revolving debt is largely credit card debt.

Tie that to something else we recently relayed:

Across the nation’s four biggest banks, consumer loan charge-offs increased 73% in Q1, as they wrote off $3.4 billion in bad debt during the first three months of the year.

Amid this pessimistic backdrop is word that credit card delinquencies continue to increase: 

• According to the New York Fed, the share of credit card debt that’s delinquent by 90 days or more hit 4.57% in Q1/2023, up from 3.04% a year earlier. 
• Among 18-29 year olds, the credit card delinquency rate was 8.3% in Q1/2023, up from 5.1% in Q1/2022, though still lower than pre-pandemic rates. 
• For 30 to 39-year olds, the credit card delinquency rate surpassed pre-pandemic levels, reaching nearly 6.3% in Q1. 
• Back to the banks: Discover Financial Services (DFS) 30-day credit card delinquency rate came in at 2.8% for the quarter, up from 1.8% last year. Capital One’s (COF) went from 2.4% to 3.7%. 
• And, in an ominous sign, at American Express (AXP), which tends to be the Costco of credit cards because of its relatively affluent base, 30-day delinquencies inched up to 1.2% in its most recent quarter from 0.8% one year ago. 

The writing on the wall has never been clearer. 

As for the stock market, it means we could see more earnings warnings like the one we saw from Dollar General from other discounters and retail outfits. Of course, Dollar General stock got hammered on its report last week. If you’re a long-term investor, maybe this is a buying opportunity. However, if you need your money anytime soon, it might make sense to take some profits (if you have them) and/or sit on the sidelines. Because we think the pain might only be beginning for retail, particularly if it’s closer to the low end. 

The Bottom Line: On the flip side of this, high-end retailer Lululemon (LULU), who we waxed bullish on just last week, crushed its Q1. Sales were up 24% and LULU raised full-year guidance. 

Taken together, all of this data makes it clear: The credit card bubble will likely burst among consumers impacted the most by inflation. What happens to the middle-of-the-road consumer is anybody’s guess, but proceed with caution. And, as has been the case for quite some time now, the biggest bright spots sit in the upper echelon with the LULUs and Costcos of the world.

• 16 Best Retirement Communities in Florida Near the Beach
• The Most Researched Stocks [FREE REPORT]
• Can We Believe Cash Grain Indexes?
• Most Read From The Spill: The Biotech ETF Poised for Growth in 2023