Consumer credit signals 'outright weakness,' spending may drop

Stocks are facing pressure as the markets digest the disappointing earnings reports from major banks, including JPMorgan (JPM), Citigroup (C), and Wells Fargo (WFC). NewEdge Wealth Chief Investment Officer Cameron Dawson joins Yahoo Finance to discuss the market outlook.

Dawson notes that she is closely following bank discussions about credit health for both consumers and corporations — in other words, how end customers are dealing with a higher-for-longer environment. Despite bank conversation about post-pandemic normalization, Dawson questions whether new levels of delinquency and higher balances compared to disposable income actually represent "outright weakness" in credit.

Dawson acknowledges that consumers have been able to "keep on spending" despite higher interest rates. However, she points out that other factors, such as rising debt levels and flatlining wage growth, could start to impact consumer spending going forward.

Regarding recession fears, Dawson indicates that GDP growth estimates will be a key data point to monitor.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance.

This post is written by Angel Smith

Video Transcript

- The stocks falling after those big bank earnings kicking off this morning. We had shares of J.P. Morgan, Citi, and Wells Fargo. They were moving after this net interest income concern coming out here. Now, all of these stocks moving to the downside. Citi had been up earlier this morning. It looks like now after digesting that report, we're seeing it coming down a little bit here.

To discuss more of this, we are joined by Cameron Dawson, NewEdge Wealth Chief Investment Officer. Cameron, great to meet you officially. So excited to have you on this morning. I do want to start on these bank earnings because I'm curious from your perspective, what's standing out most to you about which of these firms is able to kind of withstand this higher for longer environment and what else is seeming like the big headline for you this morning.

CAMERON DAWSON: Well, we think that the largest banks are the ones that are going to be able to deal with higher for longer far better than the smaller banks, which we'll start to hear from more next week. Really, the thing that we're listening for very closely from the banks is their discussion about credit health, not just for consumers, but also for corporations.

How are those end customers dealing with a higher for longer environment? And what we are hearing from the likes of J.P. Morgan is that they keep using this term normalization, which just means that we're seeing things get back to more normal levels and territory post the pandemic where you saw things be in very odd levels for quite some time.

So think of things like credit delinquencies or the percentage of balances compared to disposable income. All of these things are getting worse, but they're just normalizing. So the biggest thing for us to watch is, does normalization turn into outright weakness? Meaning that there's bigger credit issues under the surface.

- Cameron, what do you think the likelihood of that is now?

CAMERON DAWSON: I think that we're starting to see signs of fraying in those smaller businesses as well as lower income borrowers. So if you look at the aggregate numbers, it can be rather misleading. They all look still very healthy, but there are certainly signs and pockets of weakness. And it's where we're also listening very closely for as we go through this earnings season. Is what are consumer companies saying about demand from consumers?

We've seen this incredible ability for consumers to deal with higher interest rates, higher inflation, and just keep on spending. But are we starting to reach levels where we've seen real wage growth start to kind of sideline versus the increases we had been seeing. Are we seeing the levels of debt kind of reaching a ceiling of how much can be tolerated. If we're hearing signs of that, could we start to see consumer spending slow down. And that's very important, of course, for GDP estimates given the fact that consumer is 70% of GDP.

- And the consumer looking a little bit more frustrated with the inflation picture this morning off of that consumer sentiment index, which reminds me of Jamie Dimon not really wanting to talk about the recession elephant in the room with media this morning. I'm curious from your perspective, how likely is the recession scenario versus a potential no landing scenario?

CAMERON DAWSON: Yeah. I mean, it's been incredible, the shift in narrative over the last 12, 18 months between the absolute certainty of a recession to now the absolute certainty of having no landing. The thing for us to watch, and we keep calling it probably the most important chart in markets right now, is GDP growth estimates for 2024.

What we saw over the course of the last few years is those estimates were slashed in '22. But starting in mid '23, they started to rise quite significantly. And in this year alone, we've added about 100 basis points to GDP forecast for '24. And now we're sitting at 2.2%, which is effectively that no landing kind of scenario.

So the big question is, can we stay at that 2.2% estimate? What could potentially drive it higher? Or what could be those drivers that we could see estimates revised lower, which really would be a shock given now that we have pretty much consensus completely on soft landing camp.