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The Sectors That Are Suffering (and Thriving) as Debt Rises

As inflation rises and the Fed continues to raise interest rates, consumers are getting hit in the wallet… namely in their credit cards.

Credit card balances have jumped to nearly $986 billion, according to the Federal Reserve’s New York bank, which released its Quarterly Report on Household Debt and Credit last week. That’s a $394 billion, or 2.4%, increase from the last quarter of 2022.

a pile of credit cards
Source: Teerasak Ladnongkhun/

Consumer credit spending could be rebounding from the lows it reached during the COVID-19 pandemic, when a combination of factors like lockdowns, stimulus checks, and layoffs spurred consumers to pay down debt and spend less.

Aaron Klein of the Brookings Institution says credit spending is returning to normal – but “‘pre-pandemic normal’ ought to concern Americans. It is not normal how much credit card debt this country has, how expensive it is for people to continue to carry that debt.”

So what’s causing it… and how can you make money amidst the bleakness?

Here’s What’s Behind the Credit Spree

Core CPI, which excludes volatile energy and food prices, is seen as a better predictor of future inflation, and it rose 5.6% from a year earlier according to the most recent report. This has Wall Street worried inflation may be stickier than previously thought.

Savings rates had been going up for a while but now are coming way down, forcing consumers to rely more on credit for their spending. But credit spending is more expensive now as the Fed continues to raise rates.

The Federal Open Market Committee (FOMC) is likely to raise interest rates again at its March meeting. The FOMC is also likely to signal further increases will be likely after that. When all is said and done, 2023 could leave us with a 5% to 5.25% rate.

With consumers paying more interest on their mortgages, student loans, and auto loans, that leaves less disposable income to pay off credit debt.

It may not sound like credit spending is related to the market, but it will affect sectors that we’re normally bullish on and could benefit others in the short term, at least. Here’s how.

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Retail investors should take note of the overall trend of inflation, which has eased slightly since June but is still elevated at 6.4%.

That could keep consumers from spending as much, especially on those items in the consumer discretionary sector, which are likely underperform compared to stocks in the consumer staples sector if consumers have to start pulling back on spending.

Remember, consumer discretionary describes goods and items that are non-essential and bought with extra income. Consumer staples are those must-have items, like groceries, fuel, and other household goods.

While consumer staples continue to pay off, there’s another sector that could reap short-term rewards, and it’s the sector issuing all this credit – the banks. The more credit card debt consumers take on, the more money credit card issuers will make.

However, as we watch debt tick up, if consumers start defaulting on their debt, it will negatively impact financial stocks… until then, it will benefit them.

We have a nice mix of consumer and financial stocks listed in our Top 5 Stocks for 2023 report, plus a few surprises.

The Bottom Line

Investors have shown they are willing to push stock prices higher. The question now is whether they will continue to do so now that interest rates are moving higher.

Look for credit debt to continue to rise through 2023 as interest rates creep up.


John and Wade

P.S. If you’re looking for the next investing megatrend, then it may be closer to home than you think. As companies learned some hard supply-chain lessons during the pandemic, many moved operations back home. Learn more about the sectors benefiting from deglobalization – and where to find them — in our colleague Eric Fry’s special report.

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