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  • The Federal Reserve's plan to curb inflation could cause a recession.
  • Delinquency and default rates are climbing at credit card issuers.
  • Fewer home sales because of higher mortgage rates are reducing demand throughout the industry.
  • Shifts in consumer spending have boosted inventories, reducing transportation demand this holiday season.

The Federal Reserve suggested in its policy statement yesterday that if inflation falls or the economy worsens, future rate hikes could shrink from their current 0.75% per meeting pace. Unfortunately, the central bank also suggested peak interest rates would likely be higher than previously thought and chairperson Jerome Powell remained hawkish during his post-meeting remarks.

The takeaway? The Fed acknowledged its rapid pace of increases could take a toll on the economy, but it sees little evidence hikes are wrestling inflation from its high perch. So until inflation recedes or its ignored second mandate, employment, weakens, the central bank will likely remain the enemy of credit card, housing, and transportation stocks.

Consumers’ declining financial health is bad news for credit card stocks

In 2020 and 2021, monetary and fiscal policies, including stimulus payments, made consumers flush with cash. As a result, consumers stockpiled savings, paid down debt, and invested in real estate, stocks, and emerging assets, such as cryptocurrency.

Those easy-money policies were necessary to prevent a recession, or worse, because of COVID, but they also caused inflation that’s flipped the script for consumers. Nowadays, expenses are growing faster than income, so negative real wages are forcing consumers to ratchet back spending and tap savings and unused credit card balances to make up the difference. Moreover, the need to play catch up by a late-to-act Federal Reserve has caused asset values to retreat, limiting consumers' ability to navigate worsening economic conditions.

That’s not a good recipe for credit card stocks.

In “It's Time to Cash in on Your Credit Cards,” Ed Ponsi writes, “Personal savings are being drained, reaching their lowest level in 12 years, according to the St. Louis Fed…While savings are plunging, credit card debt is rising. According to the St. Louis Fed, consumer loans currently stand at $926 billion, an all-time high.”

The high debt levels are particularly concerning for low-to-mid-income families, especially if they have lower credit scores. In August, the average interest rate for credit card borrowers who roll over a balance every month was 18.4%. It’s likely higher than that now because the Fed’s raised rates by 1.5% since then. According to NerdWallet, the average rate on new credit cards is 20.6%, and for store-brand cards, it’s 27%.

Higher rates and larger credit card balances increase the risk more consumers will become delinquent or default on their cards, especially if high rates push the U.S. into a recession. We already see signs of strain. For example, delinquency and default rates climbed at American Express  (AXP) , Capital One  (COF) , Synchrony Financial  (SYF) , and Discover Financial Services  (DFS)  last quarter leading those companies to set aside more money for future losses. As a result, Synchrony Financial and Capital One reported a double-digit year-over-year earnings decline last quarter. If credit card companies set aside more money because consumers become more strained by job losses in the coming quarters, earnings per share could fall industry-wide.

Mortgage rates remain a headwind to housing stocks

Budget tightening hampers spending on home remodeling and purchases, but it’s the Fed’s impact on mortgage rates that are dealing the stiffest gut punch to housing stocks.

During the easy-money days post-COVID, it was easy to find mortgages below 3%. However, a steady diet of increases to the Fed Funds rate this year has corresponded to a significant increase in lending rates for purchases and home improvement loans. As a result, the average 30-year mortgage rate is 6.95%, up from 2.65% in 2021 – the highest rate since 2001.

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Unsurprisingly, higher rates are taking a toll on the industry. In October, new home sales fell by a seasonally-adjusted annualized rate of 10.9%, while existing home sales fell 1.5%. At Wells Fargo  (WFC) , mortgage originations declined 60% in Q3. It could only be a matter of time before slowing sales activity translates into lower home prices.

The news isn’t only discouraging for home builders and mortgage companies, though. A strong housing market was a boon to companies like Whirlpool  (WHR)  and Trex  (TREX) , but demand for appliances, decking, and other housing-related products and services is slowing. Last quarter, sales fell 13% and 44% year-over-year at Whirlpool and Trex, causing earnings per share to tumble 33% and 78%, respectively.

Tough times for transportation stocks

A downtick in rejection rates in March was one of the first signs that transportation companies were starting to see demand slow. Since then, rejection rates at trucking companies have tumbled to just 5%, the lowest since May 2020, when GDP declined by one-third because of COVID restrictions.

Importantly, spot rates charged to transport goods have fallen sharply this year, and contract rates are following them lower.

The situation isn’t any better for ocean freight, where container prices from China to California have fallen from nearly $10,000 during the supply chain fiasco to less than $2,500, according to Freight Waves. In addition, activity at the Port of Los Angeles, the nation’s largest port, was the slowest since the Great Recession in September, further reflecting a slowdown in shipping.

The fourth quarter is usually strong for truckers because of holiday shipping demand. However, this year could be disappointing based on what C-suites have said on third-quarter conference calls. For instance, Landstar  (LSTR)  CEO Jim Gattoni told investors during its call, “Everybody's [indicating a] flat to a soft, muted peak season.” If so, transportation stocks could see their top and bottom line growth slip, given tough year-over-year comparisons in 2021.

The likely culprit for a downbeat outlook this season is store inventory levels. Retailers have been saying that inventories are high since summer, so there’s been less need to stockpile goods ahead of Black Friday.

The Smart Play

At some point, the stock market will sniff out a bottoming in the economy and better times ahead. But, until then, it’s likely to be rough going, given the Fed’s plans to further raise interest rates.

Currently, the CME’s FedWatch tool shows odds suggest a Fed Funds rate between 5% to 5.5% in May 2023. After yesterday’s increase, we’re currently at 3.75% to 4%. So, as it stands, smart money expects at least another 1.25% in central bank increases before then. If so, that would increase the pressure on the economy, something that the Treasury yield curve is reflecting. Last week, the 10-year/3-month yields inverted, with short-term rates eclipsing intermediate-term rates. Historically, the 10/3 inversion has been the best predictor of a recession within one year.

Of course, there will be tradeable rallies and bear market bounces, but the stock market’s best returns typically happen when the Fed responds to a weak economy by cutting interest rates. We’re not there yet. So investors should stay cautious about credit cards, housing, and transport stocks until then.

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