- In terms of both household debt and personal savings, we see US consumers as considerably better off than they were prior to the Great Recession; moreover, retail lenders have exhibited greater discipline.
- In the past few years, consumer finance stocks have often traded in a way that suggests a lot of anxiety regarding the next economic downturn, as many investors may still be a bit shell-shocked from their experience of the Great Recession and its aftermath.
- This combination of factors could present us with some attractive investment opportunities in 2020.
The resilience of the US consumer will be a key theme for us in 2020. Over the past few years, we have seen consumer finance stocks periodically trade in a manner suggesting considerable fear about the next economic downturn, perhaps reflecting investors' "muscle memory" implanted during the Great Recession of 2007–09, when the subprime mortgage crisis and collapse in real estate prices severely depressed consumer spending. But we also can point to some noteworthy differences between consumers' current financial condition and what it was leading up to the Great Recession. In particular, we'll highlight the debt service ratio and the personal savings rate.
Looking back to the early 1990s, the US household debt service ratio (consumer financial obligations as a fraction of disposable income) rose fairly steadily until peaking in December 2007, the start of the Great Recession. As the recession gained traction and the subprime mortgage market imploded, the debt service ratio plummeted—and has trended well below its historical average ever since. Thus from the standpoint of required debt payments versus disposable income, consumers' financial condition seems less fragile to us than it did prior to the last recession.
At the same time, the personal savings rate (the percentage of disposable personal income retained after outlays and taxes) has been trending broadly higher since its September 2005 low. As of late 2019, the savings rate remains above its historical average, meaning that consumers have been setting aside relatively greater resources as a nest egg or for their retirement.
We don't mean to suggest that the consumer is "bulletproof" and would be unhurt by an economic downturn. As always, consumers' well-being depends largely on overall levels of employment, wages, stock prices, and other factors. Moreover, no one can deny that consumer debt is considerably higher than it was five years ago. Debt from student loans and automotive financing is particularly elevated, and we're watching both elements closely.
All in all, we think the data above makes a convincing case that the US consumer is in considerably better financial shape as of late 2019 than prior to the Great Recession. We'll add one other consideration: Since 2009, companies that lend to consumers have exhibited greater discipline when extending credit. Yet despite all these positives, the valuations of many consumer finance stocks remain relatively depressed, by our reckoning. We believe this combination of factors could present some attractive investment opportunities in 2020.
Next steps to consider
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