Signs that consumers are straining under their considerable debt load sent a scare through Wall Street on Wednesday. Higher personal-bankruptcy filings, eroding consumer-related credit quality and a likely shakeout in the consumer lending boom are not the strongest ways to enter the Christmas season.
The Dow Jones industrial average, continuing its see-saw pattern of the week, fell 29.98 points, to 4753.68, on heavy New York Stock Exchange volume of 434 million shares. Broader market indicators also fell as declining issues outnumbered winners by 15 to 8 on the NYSE and 12 to 7 on the Nasdaq market. The Nasdaq composite index dropped 12.77, to 1026.47.
The Dow industrials swung up to 4800 and almost immediately fell back, reaching nearly 4730 before recovering later in the day.
“Today was kind of a microcosm of the market,” said Gregory Nie, technical market analyst at Everen Securities in Chicago. “It feels like there’s a lot of motion going on but not a lot of net change. The market doesn’t seem to be focused.”
Talk of a significant downturn in economic growth–even the “R” word, “recession”–is re-entering the talk among traders, he said.
A wild card in the markets concerns stocks that have been out of favor for much of the year, Nie said. Bargain-hunting in underperforming sectors, especially the so-called defensive stocks in the food industry and retailing stocks, could keep the markets churning at least sideways. But if tax-conscious investors decide to sell their losing stocks to offset gains on technology stocks and other winners, the market’s rotation could look more like a downward spiral.
Blue-chip industrial stocks were hurt by a cautious fourth-quarter forecast by DuPont. In releasing third-quarter earnings that topped analyst estimates, the chemical giant predicted “modestly negative to flat performance” in the current three-month period.
Financial stocks, which have been one of the most highly touted sectors of the market recently, were hit by Wednesday’s disappointing earnings report by American General, a leading home-equity lender. The company disclosed an increase in its reserves against consumer-loan losses. Money Store, a consumer-finance company, sank $12.62, to $42.50.
Locally, First Chicago, a major credit-card lender, fell $2.50, to $68.37; Household International, Prospect Heights, lost $3, to $57.12; Mercury Finance, Northbrook, dropped $2.12, to $19; First Merchants Acceptance, Deerfield, fell $2.12, to $19.87.
Bond prices inched higher and yields dropped on continuing optimism that the Federal Reserve will reward a federal budget accord with a cut in short-term interest rates.
The Treasury’s auction of $11.5 billion of five-year notes brought a yield of 5.81 percent, a notch higher than the market was expecting.
The eyes of global financial markets are turning to Canada, where voters in Quebec will vote Monday on a proposal to establish national sovereignty for the largely French-speaking province.
Several public-opinion polls are due out Thursday. Last weekend, polls showed the separatist vote winning. However, Reuters reported market rumors late Thursday that a new poll will show the “no” side back on top.
It’s the consumer, stupid The undercurrent of weak consumer demand and high consumer debt rose to the surface Wednesday. Equity analysts probing the entrails of financial-service company quarterly reports began to see what has been obvious to credit analysts who track asset-backed debt securities: The consumer is showing signs of strain.
Edward Bankole, a structured-finance analyst at Moody’s Investors Service in New York, said, “We are seeing signs of weakness in overall (consumer) credit quality.”
Among the telltale signs Bankole noted: The rate of improvement in losses and delinquencies among credit-card lenders is the slowest in three years. Personal bankruptcies were up in the second quarter for the first time in three years. The use of pre-bankruptcy consulting services is climbing.
While the ratio of household debt to total household financial assets has been stable, he said, the rate of debt accumulation is climbing among the least credit-worthy borrowers: young families and low-income families. These are two of the groups that lenders are targeting for ever-higher growth in lending.
There’s been a proliferation of consumer finance lending at banks and non-bank finance companies, much of it targeted at the lower end of the economic spectrum and at least some of it driven by lower lending standards, said Christopher Reed of Chicago-based Duff & Phelps Credit Rating.
“The consumer has been taking on a greater amount of debt,” he said. The risk-reward tradeoff inherent in charging above-average interest rates to below-par credit risks would be tested in an economic downturn. “People are going to start seeing who the better underwriters are.”
In the meantime, the ability of consumers to stage a robust Christmas season is in doubt.
A survey of consumer spending plans for the holiday released late Wednesday by the ABC/Money magazine poll found that 36 percent of Americans plan to spend less money on gifts this season than they did last year. That’s a slightly higher percentage than poll results from a year ago and the first time in three years that the percentage has not declined.
