Investment Advisor Blog | Signs Of Topping In The Consumer Credit Cycle | Talkmarkets

Signs Of Topping In The Consumer Credit Cycle

Date: Thursday, January 24, 2019 1:28 PM EDT

Don’t bother counting me in the camp that thinks they can predict when the next recession will hit. The current consensus from those who try to do such things seems to be sometime in 2020, but I don’t think anybody really knows.

But that does not mean that keeping an eye out for economic signals is not worth doing. If the consumer credit cycle, for instance, is nearing a top, it very well may impact what multiple of current earnings you are willing to pay for shares of financial services companies. When you see a strong return on equity metrics for the full year 2018 this earnings reporting season, you might consider the notion that further expansion could be minimal.

In recent months I have come across a couple of interesting press reports that help shed some light on where we are in the current consumer credit cycle, both from the Wall Street Journal.

First, we had a piece in mid-December about how credit reporting giant Experian was going to start including cell phone bills in credit reports. The goal is to boost credit scores so that lenders can widen their pool of eligible borrowers:

“Most lenders tightened standards dramatically after the 2008 financial crisis, and have been in intense competition for the most creditworthy borrowers ever since. And while most large banks have limited appetite for the subprime borrowers they lent to in the runup to the financial crisis, some have been eyeing customers with thin borrowing histories as a new revenue stream, a sign the lenders believe the good economy still has room to run.”

So rather than scare their investors and regulators by accepting lower credit scores when considering new borrowers, why don’t we ask the credit scoring bureaus to find ways to raise credit scores so that more people qualify. Yikes.

And cell phone bills are not the full extent of the changes. The article goes on:

“Fair Isaac Corp. , creator of the widely used FICO credit score, is close to launching a new credit score in partnership with Experian that will factor in consumers’ history managing their checking and savings accounts, which will give a boost to most consumers who keep at least several hundred dollars in their accounts and don’t overdraw.”

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Moon Kil Woong 2 years ago Contributor's comment

The economy and stock market look fine for another year or so right now after overcoming a rough patch with tariff, shutdown, rising inflation, Federal Reserve tightening, and slowing growth intrigue. Hopefully, this next year will be calmer.

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