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How Household Debt Shapes The Stock Market

How Household Debt Shapes The Stock Market

by T. Claire Kest

Earlier this month, a client called expressing concern about the health of the American economy: "Everyone I know is broke with maxed-out credit cards. People can't pay their bills. I feel like the stock market is going to crash." We temporarily assuaged this client's concerns by reminding him that we don't make decisions based on feelings but on goals and data. Knowing that his goal was long-term growth, we turned to the data to answer the question, what is the relationship between household debt and the stock market? 

Current Debt Level
As per the Federal Reserve Bank of New York, during the first quarter of 2024, household debt, which includes mortgages, home equity lines of credit (HELOC), auto loans, student loans, credit cards, and other personal debt, surged by a staggering $184 billion, reaching a total of $17.7 trillion. Moreover, the report also revealed increased delinquency rates across all categories. While this data may paint a picture of a struggling economy, it's important to consider multiple data points to make our decisions. We need more information. 

Why Do We Have Higher Debt?
As of May 30, 2024, the S&P 500 has reached record all-time highs 24 times in 2024. According to a study published in The Review of Financial Studies, "household borrowing increases significantly following stock market booms, and the effect is stronger for households with higher exposure to the stock market" (Mian & Sufi, 2014). During periods of robust stock market performance, individuals may feel wealthier due to the appreciation of their investment portfolios. Higher net worth can prompt investors to take on more debt, leveraging their perceived financial strength to access additional credit for consumption or investment purposes. 

Further research by the JPMorgan Chase Institute highlights the spending response to stock market movements, suggesting that stock market gains are associated with spending "splurges" on credit cards and flows into investment brokerage accounts. In their 2021 credit card sample, a 10 percent rise in stock prices correlates with an increase in average spending of just under 1 percent. Interestingly, male investors are more likely to increase spending in response to a higher stock market than women and men who are not investors. As stocks rise, individual investors fear missing out and jump on the bandwagon. 

Two additional reasons for the higher debt are student loan payments and things cost more due to inflation. For example, a new car price in 2014 averaged $37,600 compared to $47,433 in 2024. Student loan payments resumed for 43 million Americans in October 2023 after the final Pandemic-Era payment pause extension expired. Serious delinquencies (90 days or more delinquent) in this category of household debt are the lowest they have been in more than two decades, falling below 1%. Mortgage delinquencies are also near all-time lows. 

Will  High Debt Cause The Stock Market To Crash ? 
The last time we experienced  serious delinquencies in credit card debt exceeding 10% was in Q1 2021, at the beginning of a year when the S&P 500 rose 26.89%. Morningstar reported on that banner year's tremendously successful stock performance, stating, "Over the course of 2021, the U.S. Market index hit 66 new highs and outperformed international stocks in every quarter." The prior peak in consumer debt occurred in Q2 2010 when we entered a bull market run that extended for ten years. 

What To Do
While the data indicates a relationship between the stock market, and American household debt, correlation does not mean causation. Where we are in the cycle is only knowable after the fact. We don't have a crystal ball to know which direction the market will go tomorrow, but one thing data supports emphatically is that the stock market does go up over time. We accept short-term volatility to participate in the growth. Hurlow Wealth Management Group advisors don't try to time the market. We get in when we can and get out when our clients need money or see an opportunity to rebalance. If you are worried about making investment decisions, it might be time to speak with a financial advisor. Call 812-333-4726 or click here to schedule today. 

Services offered through Hurlow Wealth Management Group, Inc., a Registered Investment Adviser. Hurlow Wealth Management Group, Inc. does not provide tax, legal or accounting advice.  Advisory services are only offered to clients or prospective clients where Hurlow Wealth Management Group, Inc. and its representatives are properly licensed or exempt from licensure.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Hurlow Wealth Management Group, Inc. unless a client service agreement is in place.
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