As the Market Churns, Consumers Go Deeper in Debt

The market continues to churn as equities try to digest their large gains from January. I continue to fear investors are growing complacent here and are counting on the economy to avoid a recession or for the Federal Reserve to achieve a ‘soft landing’.

It does seem more economic pundits are starting to project and realize interest rates still have a ways to go on the upside. Yesterday, investors got hit by a much higher than expected PPI report and two non-voting Fed governors making the case for a 50bps rate hike at the next Fed meeting. The next major move in equities feels like it will be on the downside.

On Wednesday, Victoria Fernandez, chief market strategist at Crossmark Global Investments, said she believes that the Fed will likely move its key interest rate above 5% in coming months and the economy will have a ‘mild recession’.

Famed analyst and investor Dan Niles is more pessimistic. He sees the Fed pushing their Fed funds rate closer to 6% at some point in 2023. This should push stocks into a broad-based selloff in the second half of the year as profits disappoint and multiples shrink.

My view aligns quite strongly with Mr. Niles at the moment. As Liz Ann Sonders, the Chief Investment Strategist at Charles Schwab & Co, noted yesterday, the spread between S&P 500’s earnings yield and U.S. 10y Treasury yield has fallen to lowest level since 2010.

Add in the most inverted yield curve since 2007, the negatives around equities continue to pile up. Bear markets simply don’t end with the S&P trading at 18 times earnings, negative profit growth, and 5% risk free alternatives in six-month Treasuries in my humble opinion.

The consumer also seems to be going deeper in debt to maintain their standard of living. The amount of debt owed by U.S. households climbed $394 billion in the fourth quarter to just under $17 trillion. This is the largest quarter-over-quarter increase in household debt in 20 years. This took overall debt balances $2.75 trillion higher than at the end of 2019, prior to the pandemic, to put it in perspective. Mortgage balances accounted for nearly two thirds of the overall increase. Credit card balances jumped by $61 billion to nearly $1 trillion in the recently completed quarter.

Blade Air Mobility

However, we are going to end the trading week with a more optimistic tone as in this column. I am going to highlight one of the few speculative investments I have made in my portfolio in recent months. Earlier this week, I took a small initial stake in Blade Air Mobility (BLDE) , which trades just below five bucks a share.

Blade Air Mobility provides transportation services through charter and by-the-seat flights using primarily helicopters, which the company operates as an asset-light business concern. Approximately half of Blade’s revenues come from delivering organ transplants and the other half from ferrying passengers from hubs like New York City to LaGuardia and JFK airports.

The company’s economics should improve as electric vehicle ‘air taxi’ production comes online. The company should deliver $180 million in sales once the FY2022 year completes and should see at least 60% sales growth in FY2023. Blade has an approximate market cap of $350 million and had just over $200 million of net cash on its balance sheet as of the end of third quarter.

And that is an example of how I am keeping a few toes in the market while anticipating lower entry points to deploy additional capital in the coming quarters.