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Banking on Human Nature

The markets gave back some of the gains this week as investors received mixed economic news, and a pandemic scare that seems to repeat every ten years or so.  Fortunately, the Senate impeachment trial has had virtually no effect on the markets since investors feel confident on its outcome.  With only one week left in January, I can say not only has it been a relatively warm and wet month, but one in which investor enthusiasm hasn’t waned.

Let’s start with the news that has the potential to move the market in the weeks ahead.  The new coronavirus that originated in China is now slowly making its way around the world.  There are over 900 confirmed cases with 26 fatalities (as of this writing).  While it may not seem intuitive that it would have an impact on the stock market, it could.  I went back and ran charts for the past two pandemics over the last two decades and found a correlation.  In February 2002, we lived through the SARS pandemic, another coronavirus, which infected 8,098 people and had a fatality rate of 9.6%.  In April 2012, we experienced the MERS pandemic, also a coronavirus, which infected 2,494 people and had a 36% fatality rate.  In each case the market dropped 6.5% and 9% respectively in the month following the start of the pandemic.  I bring this to your attention not to scare you, but instead to reassure you that the drop in both cases was short and the recovery quick.  While the human toll may be high, my focus is on its effect on the markets.  Please don’t take that to mean I’m insensitive to the plight of those afflicted.

As for the economy, things continue to look mostly good.  Home sales remain a bright spot, with existing home sales coming in very strong and U.S. home inventory falling to a new low.  With the low inventory of homes for sale, we would expect home prices to continue to move higher.  Another indication that things remain on track is that consumer spending remains strong.  However, this week I came across a story that, on its surface, sounds great but could be more insidious.  It seems banks have been quietly raising people’s credit limits without being asked.  Starting in 2018, some of the largest banks took a new approach to increasing profits.  Knowing human nature, they quietly began increasing credit limits knowing that a substantial number of customers would take on more debt.  Capitol One is just one bank that has admitted to this practice, justifying it as good customer service.  Consumer credit available has jumped from $2.68T just prior to the financial crisis in June 2008, to $4.17T today.  Consumer credit card debt which dropped 24% after the financial crisis, has now surpassed the pre-crisis peak, reaching a record $880 billion at the end of September 2019.  Let’s hope this doesn’t end the same way it did last time.

While we’re on the subject of consumer credit, did you know that the way your FICO score is calculated is changing?  Fair Isaac, the company behind the FICO credit score, is updating the way it calculates creditworthiness, which will result in lower scores for some.  The changes will more harshly grade consumers with growing amounts of debt, missed loan payments and, for the first time, put more weight on unsecured personal loans.  The company believes consumers with scores above 680 who are on top of their loan payments could see their scores increase, while those with scores below 600 are more likely to see drops.  Another negative factor will be consumers who carry debt month to month or get close to maxing out their spending limits.  Look for the new scoring methodology to roll out this summer.

In closing I turn to a story which you will either find helpful or infuriating depending on your feelings toward California and its regulations.  California is considering whether to list one of the world’s most common over-the-counter drugs as a carcinogen, echoing recent high-profile battles over things like alcohol and coffee.  The drug is acetaminophen (most commonly known as Tylenol), used to treat pain and fevers.  There have been 133 peer-reviewed studies on this matter, some of which indicate there could be an increased risk of some types of cancers, however, the results are not conclusive.  Apparently, acetaminophen is difficult to examine because it is hard to isolate it from other variables that contribute to cancer.  This battle is just beginning to heat up.  Expect to hear more about it in the months ahead.  Now you know.

Bruce J. Mason, MBA