Lots of economists have talked about the deleveraging of the consumer and how it has slowed down the economy. Consumers are reducing their debt loads, perhaps because they are uncertain about the future. When consumers feel more confident, they often borrow to buy consumer goods, homes, or to invest in businesses.
Even more important than the debt itself is usually the ability of the consumer to service the debt. The ability to borrow is often fuel for a bull market—at the least, those two data series often move in tandem.
Did you realize that consumer debt service is now as low as before the huge bull market starting in the 1980s? This chart, from the Fed, is the household financial obligations ratio. It’s a ratio of financial obligations to disposable personal income. Financial obligations consist of payments on mortgage debt, consumer debt, auto leases, rental housing, plus homeowner’s insurance and property taxes.
Are you surprised we are at 1982 levels?
(click on image to enlarge)
Periods when the consumer was adding leverage, from 1982-1987, from 1994-2000, and from 2003-2007 were outstanding for the stock market.
Right now, with debt service at a relatively low level, the consumer has the capacity to take on more debt. That’s a lot of fuel for a new bull market. We will have to see going forward whether the consumer has the confidence or propensity to take on more debt. If re-leveraging does start to happen, the stock market could be much better than most expect.
HT: The Bonddad Blog
