Vadim Verkhoglyad, vp and head of research publication at dv01, argues that US consumer markets remain strong - despite recession fearmongering

Concerns of a recessionary impact on US consumer markets, and comparisons to the global financial crisis, are rampant across the media. This fearmongering is not accurate, is harming the market and is not in our best interest.

Widespread media analysis suggests that we are in a crisis: headlines focus on the increase in subprime auto delinquencies, the downturn of consumer equities and the collapse of companies like Carvana. However, data on the consumer sector indicates that these attention-grabbing articles are an exaggeration of what is occurring – the sector is performing fine and has done so for the past 15 years.

There are three reasons why we believe this. First, we are actually in the midst of a fairly normal credit cycle. This is supported by the fact that we are not seeing broad challenges in all asset classes, or even across the consumer sector.

There are material signs of negative performance of online consumer unsecured loans, with impairments and delinquencies rising from their record lows at a fast pace. However, much of this deterioration is attributable to specific weaker collateral attributes (for example, lower grade, lower FICO and lower income) and is partly reflective of underwriting changes. The underperformance among higher FICOs is also more of a correction from the significant outperformance seen in 2021 than a signal of a sectoral collapse.

It is normal for riskier loans to have higher default and non-payment levels. But if the consumer market was in trouble, we would see significant evidence of a deterioration of consumer credit performance in other asset classes – for example, autos or mortgages – and so far, we are not. Instead, there is no data to suggest there are rising impairments in the mortgage sector and we can see material outperformance in the auto market for this year.

Second, lenders and issuers are quicker to adjust than people realise. At the peak of economic uncertainty from March-June 2020, we saw a substantial tightening in lending standards. This was followed by a rapid return to pre-pandemic trends and a loosening of standards in 2021, as investor confidence and risk-taking capacity increased in the consumer credit sector.

This year, we have already seen the unsecured market tighten at the fastest pace we’ve seen outside of Covid in terms of new issuance standards, with lenders focusing on lower FICO scores. Standards are now trending towards their pre-Covid levels and tightening across grades, in response to uncertainties in the market.  

Third, unlike in 2007 when the mortgage market fell to its knees, there is no single sector that is collapsing now. This points to the strength of the US economy and therefore the consumer sector.

Despite the concerns raised in 2016 and 2020 about the market, no major issuers have collapsed and loans aren’t going to be defunct. As a sign of the market’s strength - despite the wide spreads, particularly in the consumer ABS space - not a single rated tranche from any major consumer unsecured issuer has ever taken a single dollar of loss.

By refusing to see the signs that the consumer market remains robust, we are harming the US economy ourselves and risk doing more damage. This can be seen in the equity valuation of online consumer lenders across asset classes, which have been impacted by market concerns, and the present negative feedback loop for stock prices.

Clearly, the market is directly responding to the negative media sentiment – with the downturn of the mortgage and equity sectors partly caused by panic proliferated by the media.

We must accept that we are not amidst a crisis and that we are not witnessing a repeat of the financial crash. Therefore, we must make different choices to those made at the time – we should not populate headlines with fear-inducing statements and make hasty choices.

For example, the US government tried to heavily regulate the mortgage market post-2008, due to fears post the crash, and this action locked many US consumers with lower credit out of the housing market and further widened inequality. This kind of reaction could be repeated, if we do not take care.

US investors must look at the data objectively to see that the concerns around the consumer market are unfounded and stop panicking.