Household debt by the numbers, plus ARKK, the economic cycle, and Vanguard's capital market assumptions
The Sandbox Daily (8.8.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
total U.S. household debt rises to $17.06 trillion
does ARKK hold the line?
where in the cycle is the U.S. economy
Vanguard’s capital market assumptions
Let’s dig in.
Markets in review
EQUITIES: S&P 500 -0.42% | Dow -0.45% | Russell 2000 -0.59% | Nasdaq 100 -0.87%
FIXED INCOME: Barclays Agg Bond +0.24% | High Yield +0.21% | 2yr UST 4.758% | 10yr UST 4.026%
COMMODITIES: Brent Crude +0.80% to $86.02/barrel. Gold -0.54% to $1,959.4/oz.
BITCOIN: +2.95% to $29,980
US DOLLAR INDEX: +0.51% to 102.565
CBOE EQUITY PUT/CALL RATIO: 0.65
VIX: +1.40% to 15.99
Quote of the day
“Volatility actually is the opposite of risk. It’s an opportunity. But you need to think through and fight some basic human weaknesses.”
- Jeff Ubben, ValueAct Capital
Total U.S. debt rises to $17.06 trillion dollars
Total household debt balances across the United States increased $16 billion in the 2nd quarter of 2023 to reach a total of $17.06 trillion, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed.
Mortgage balances were largely unchanged and stood at $12.01 trillion at the end of June – this makes sense given declining mortgage originations and higher interest rates capping transactions. Mortgages make up an overwhelming slice of the pie.
In terms of 2nd tier debt balances, credit cards saw the greatest increase across the categories – rising $45 billion – to $1.03 trillion, while auto loan balances added $20 billion to its $1.58 trillion total. Meanwhile, student loan balances declined by $35 billion to $1.57 trillion total.
From the pre-pandemic era of 2019, the debt load has increased by $2.9 trillion, $16 billion of which came between April and June 2023.
Elsewhere, credit card and auto loan payments in serious delinquency (90+ days) continue to trend higher.
The rise in interest rates over the last year and a half has profound downstream effects across all lending markets. Credit cards are but just one example where rates have soared, increasing from 14.5% in early 2020 to 20.7% at present moment.
With higher borrowing costs, signs of economic stress are flaring up especially for young adults aged 18-39 – with these lower two age brackets (18-29, 30-39) starting to approach the Great Financial Crisis levels.
Here are credit cards broken out by age bracket for loans transitioning into serious delinquency (90+ days):
But, as Callie Cox of eToro points out below, credit card debt is just 6% of household total deposits. So despite the absolute debt levels rising and some cohorts falling into greater delinquency, the debt load on balance remains quite manageable.
And here are auto loans transitioning into serious delinquency (90+ days), also moving higher:
Bottom line, Americans’ debt levels continue to climb to new heights at a time when economic conditions are stable but slowing. And with Americans’ excess savings stock drawing down, there simply hasn’t been enough progress in getting Americans to curtail their spending habits that it will be worth monitoring delinquencies in the coming quarters.
Source: Federal Reserve Bank of New York, Reuters, Callie Cox
Does ARKK hold the line?
Selling has gripped the markets as major indexes and sectors run into overhead supply. This is particularly true for the more growthy, high beta areas of the market.
From failed moves tend to come fast moves in the opposite direction. Is that what’s happening here for Cathie Wood’s flagship fund, the ARK Innovation Fund (ARKK)?
Despite its strong performance so far in 2023 – returning +44.5% year-to-date – the speculative growth play is still more than 70% off from its prior bull market peak, while the S&P 500 is within a stone’s throw of reclaiming its all-time high.
ARKK is one gauge for measuring the market’s risk appetite. Holding this key level around $45 and the uptrend off the market lows remains intact, but undercutting these levels will likely come in an environment where stocks are under pressure.
Source: The Weekly Grind
Where in the cycle is the U.S. economy
Trying to establish where an economy exists in the economic cycle at any given time is messy and highly subjective, especially around turning points.
At present moment, we saw real GDP reaccelerate in Q2, led by stronger business investment. The labor market remains tight and robust. Consumer spending is moderating but still on a solid pace. Inflation is falling like a rock, although the final gains from the current 3% reading to the Fed’s stated mandate of 2% will be a battle of inches. The Fed is nearing the end of its tightening cycle so the majority of restrictive monetary policy should be behind us. And on and on and on.
Certain drivers supporting the economy include CapEx and onshoring efforts, strong payrolls and wage gains, and improving consumer sentiment – all real bright spots.
But risks (always) remain humming in the background – those include the higher cost of capital, tighter bank lending standards restricting credit availability, and monetary policy is slowing growth and weighing on demand.
Source: Ned Davis Research
Vanguard’s capital market assumptions
Capital market assumptions quantify the forward-looking risk and return prospects for various investable asset classes.
Weighted together, the collection of these assets are the essential inputs to formulating a strategic asset allocation framework – or, more plainly, a broadly diversified multi-asset portfolio. After all, asset allocation is the primary determinant of long-run portfolio performance.
Vanguard, one of the world’s largest asset managers, makes their asset class return and volatility assumptions public. Below are the 10-year forward looking forecasts.
Three key takeaways here:
Vanguard expects international equities to outperform U.S. equities over the next decade
Prospective bond yields, while depressed against longer-term historical averages, are significantly more attractive for income-oriented investors on a go-forward basis on the heels of this major reset higher in the term structure
Cash is no longer trash
Source: Vanguard, Visual Capitalist
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.