The Dow Jones Industrial Average recently reached 40,000 for the first time.
Despite challenges like inflation, high interest rates, and growth concerns, the broad market has achieved 23 new all-time highs. International stocks have also surged as interest rate expectations have fallen.
The health of the economy, driven by robust consumer spending, is a key contributor to this market performance. Recent data show consumers’ financial health remains strong despite higher prices, layoffs, and reduced savings rates. Since spending accounts for over two-thirds of GDP, healthy consumer finances, wage increases, and confidence are crucial for corporate profits and economic growth.
Household net worth is at an all-time high, more than doubling since 2007, despite the pandemic and 2022 bear market. Rising household net worth can drive consumer spending since the more money people have, the more they feel they can spend – a phenomenon known as the “wealth effect.”
When people feel they are in a good financial position, they tend to spend more, which can drive business profits, higher wages and ultimately boost stock prices.
While consumer balance sheets have grown in aggregate, consumer debt levels are also rising.
According to the Federal Reserve Bank of New York’s latest Household Debt and Credit report, delinquency rates across all consumer debt levels increased in the first quarter of the year. While mortgage debt, student loan debt, and home equity loan delinquencies remain around their recent trends, credit card and auto loan delinquencies have jumped.
Higher interest rates can make servicing these debts difficult. New debt issuance has slowed since the Fed began raising rates: excluding mortgage debt, the growth rate of debt balances has decelerated from 7.3% a year ago to 4.8% in the first quarter of 2024. While monthly payments will continue to be a challenge for many households, the fact that consumers are adding debt at a slower rate is positive.
The bottom line?
The strong consumer is one reason markets have achieved new all-time highs this year. In the long run, the health of consumers and the broader economy is a far more important driver of market performance than day-to-day headlines.
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Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR, and virtually throughout the U.S.
