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Record Debt & Plunging Income Mix a Toxic Cocktail for Dow Jones Bulls

Last Updated September 23, 2020 1:54 PM
W. E. Messamore
Last Updated September 23, 2020 1:54 PM
  • More dismal economic data will reverse the stock market rally.
  • The U.S. held record household debt going into the COVID-19 panic.
  • Then disposable personal income and consumer spending crashed in March.

The Dow Jones has achieved a recovery that’s been just as head-scratching as it has been robust. But more dismal economic data reveal the sobering reality of a devastated economy.

The latest personal income and consumer spending data are brutal leading indicators for the future of stock market valuations.

The Bureau of Economic Analysis reported Thursday that real disposable personal income decreased by 2% in March . Even more harrowing – real consumer spending cratered 7.5%.

stock market threat income and consumer spending crash in march
Consumer spending fell off a cliff last month. | Source: U.S. Department of Commerce Bureau of Economic Analysis 

To put this personal income crash in perspective, U.S. household income fell a total of 3.5% for the entire year of 2008 compared to 2007 income levels.

The American economy just experienced nearly two-thirds of that in a single month. The trend is on course to be the worst collapse in U.S. disposable income in history.

real us median household income graph federal reserve census bureau
The U.S. could suffer its biggest-ever collapse in disposable income. | U.S. Census Bureau / U.S. Federal Reserve 

The collapse in consumer income and spending power will undoubtedly spill over into corporate earnings next. The stock market will reflect this unfortunate reality sooner or later. And the income crash could not have come at a worse time for America.

America headed into the COVID-19 crisis with record levels of consumer debt.

Income Crashed as Americans Held Record Household Debt

If you think this year’s stock market crash is over, watch this eerily familiar 2007 CBS News segment for a sobering #ThrowbackThursday.

The 2007 household and consumer debt bubble put the U.S. economy in a much worse position to weather the 2008 financial crisis and Great Recession. That dragged out the stock market crash for 17 months – until the Dow finally hit bottom in March 2009.

Household debt includes mortgages, home equity revolving loans, auto financing, credit card debt, and student loans. Heading into the 2020 COVID-19 crisis, Americans were even more over-leveraged than they were in 2007 before the Great Recession hit.

stock market danger us consumer debt balance and composition learnbonds
Americans have more consumer debt than ever. | Source: LearnBonds.com 

In the fourth quarter of 2019, U.S. household debt had exploded to a record $14 trillion . Further, household debt per capita hit an all-time high of $42,935.13. That figure was calculated using a U.S. population estimate. But if you divide total consumer debt by Americans with credit, the figure will be much higher.

In the wake of coronavirus, Americans will have to service their record debts with drastically falling income levels. Carrying record levels of debt with less income and decimated employment prospects, it’s no wonder consumer spending has collapsed. That forebodes a long and grinding road to recovery ahead for the U.S. stock market.

With impeccable timing, David Rosenberg, one of the most famed economists on Wall Street, warned in February the consumer debt bubble would end “miserably.”

A Leading Indicator for More Dow Jones Pain

The Dow Jones Industrial Average has posted a sturdy rally since late March.

But current bullish valuations are based on rather optimistic hopes  for both the COVID-19 pandemic and its economic fallout. The latest personal income and consumer spending numbers for March have already begun to put these hopes to rest.

A wave of dismal first-quarter corporate earnings reports and bleak forward guidance for quarter two don’t look good for the stock market either.

dow jones industrial average, djia
Given the twin threats of plunging incomes and record debt, the Dow Jones rally looks suspect. | Source: Yahoo Finance 

The equities rally – which followed the swiftest crash in history –left some analysts scratching their heads. This week’s readout of the economic devastation of COVID-19 should have come as no surprise.

Several commentators termed the equities bounce the “relief rally.” Learning from the unprecedented fiscal and monetary stimulus measures adopted to fight the Great Recession, Congress and the Fed moved with startling speed to pump liquidity into the economy at a level that dwarfs the Great Recession stimulus. So the stock market rallied.

But the scope of the damage was equally severe to the drastic policy response to contain it. That is apparent in the latest data.

The dire straits of the American consumer are especially troubling news for the Dow and broader stock market. That’s because January’s euphoric valuations were entirely predicated on the strength of the U.S. consumer.

In early December 2019, Goldman Sachs Chief U.S. Equity Strategist David Kostin joined CNBC to give his 2020 stock market outlook.

He based his rosy forecast on the health of the U.S. consumer.

The consumer confidence is extremely high, and 70% of the U.S. economy is represented by the consumer.

That suddenly sounds like a very bearish assessment for the Dow Jones.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com. The author holds no investment position in U.S. equities.