The stock market, and consequently the Dow Jones today, seems largely unaffected by growing consumer credit levels. Despite concerns about potential risks linked to increased spending on credit, financial sector indicators suggest a stable credit environment. Major credit card companies continue to perform strongly on the stock market, implying investors aren’t anticipating a widespread credit crisis. This positive sentiment is further bolstered by the actions of banks.
Financial institutions haven’t significantly increased their loan loss reserves, a precautionary measure taken to offset potential loan defaults. This suggests banks are confident in consumers’ ability to manage their debt and don’t foresee a surge in mortgage or credit card defaults. Historically, banks have been quick to adjust loan loss reserves in response to perceived economic risks. The current restrained approach indicates confidence in the overall health of the consumer credit market.
Beyond consumer credit, the corporate bond market also reflects a positive outlook. Yield spreads on corporate bonds, representing the difference in yield between corporate bonds and risk-free government bonds, remain relatively low. This indicates investors aren’t demanding significant premiums for the risk of corporate defaults, suggesting confidence in corporate financial stability. The resilience of the corporate bond market further supports the idea that the broader financial market isn’t overly concerned about an imminent credit-driven downturn. The current market behaviour suggests a disconnect between anxieties surrounding consumer credit and the actual performance of financial markets.