J.P. Morgan Warns on the State of the U.S. Consumer

By Al Root


Photograph by Becca McHaffie



J.P. Morgan is issuing warnings about the health of the U.S. consumer, which could be a bad sign for the stock market.

Consumers, after all, have been keeping the U.S. economy afloat—at least, that’s the conventional wisdom. Manufacturing is flagging, with the Institute of Supply Management purchasing manager index registering a reading of 47.8 for September, the worst reading since 2009. A level above 50 indicates growth. The U.S. and Chinese trade war is also hitting business confidence, causing management teams to pull back on spending. That leaves consumers to carry the economic water.

J.P. Morgan consumer-finance analyst Richard Shane sees bad news for the stocks he covers. On Tuesday morning, he cut his target prices on every single stock he covers—including names like American Express(ticker: AXP) and Capital One Financial(COF)—by an average of almost 10%. What’s more, he downgraded shares of auto lender Ally Financial(ALLY).

“While the sector should continue to enjoy solid fundamentals through year-end, our outlook headed into 2020 becomes more cautious,” Shane wrote in a research report. “Specifically, the prospects of a slowing economy, indications of pockets of labor weakness and heightened political uncertainty all may weigh on the group.”

That’s a lot of potential bad news in 2020. Investors, for the most part, are aware of the risks. Still, it’s a good idea to take stock of U.S. consumers, considering their importance to the overall economy.

Total household debt rose to $13.9 trillion in the second quarter, its 20th consecutive quarter of growth, according to Shane. Most consumer debt is housing-related, but borrowers also have $1.3 trillion in car loans. $0.8 trillion in credit-card debt, and $1.5 trillion in student debt.



Still, Shane doesn’t see the bottom falling out of the economy. Consumer debt loads are at record highs, but debt as a percentage of household wealth isn’t, he points out. Mortgage, credit-card, and auto-loan delinquencies are stable and at levels far lower than what lenders experienced during the financial crisis—the last major downturn experience in the U.S. What’s more, “unemployment remains benign at 3.5%,” says Shane. A strong labor market support U.S. consumer spending.

Shane calls OneMain Holdings(OMF), which makes unsecured personal loans, his “top pick,” believing the stock offers the sector’s best mix of value and stable fundamentals—as well as a potential special dividend or share repurchase in 2020. OneMain shares trade for about 5.2 times estimated 2020 earnings.

The rest of Wall Street seems to agree with Shane on that stock. About 85% of analysts covering the company rate it a Buy, far better than the average buy rating ratio for stocks in the Dow Jones Industrial Average.

OneMain shares are down 2% in midday trading, at $34.24, while Ally stock is off 2.9%, at $30.49. The Dow, by comparison, is down 0.87%.

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