Consumers In Great Shape Despite, Or Because Of, Higher Interest Rates: 'Those With Cash Are Rewarded'

Higher interest rates may have helped consumers.

That’s according to Ryan Detrick, chief market strategist at Carson Group, who asked: “We know consumers are paying more for things if they are using debt. How can this possibly be a good thing?”

He answers by pointing to the millions of savers in the country — pensioners and others who have paid off their debts and are saving or investing their cash.

“The flipside is that those who have cash are being rewarded like no time over the past few decades,” he adds. “While higher rates might mean higher borrowing costs, it also means higher rates of return for savers.”

Ben Carlson at Ritholtz Wealth Management, says that looking through the lens of higher rates, there are many reasons why the stock market is up and the economy remains strong.

No Reckoning, Just Wealthier Americans

“Maybe the simplest reason is that most people are wealthier than they've ever been,” he says. “The net worth of Americans hit another new all-time high by the end of 2023. And sure, debt levels have hit new all-time highs as well but assets are growing at a much faster pace.”

The higher net worth of U.S. citizens can be illustrated by the rise in personal interest income, which stood at $1.5 trillion at the end of 2020 and rose to $1.83 trillion last month.

Carlson remarks that consumers were in terrible shape going into the financial crisis in 2008, being over-indebted and without any margin of safety through savings.

“That's simply not the case this time around. Cash balances are high. Stock prices are high. Home equity has never been higher. Yields are at the highest levels they've been in well over a decade. Investors, savers and consumers alike are in good shape,” he says.

It’s true, that this isn’t the case for everyone. Wealth is not evenly balanced and many families and households are struggling with higher prices.

But, says Detrick “If you've owned stocks and a house in the past decade or more, are college educated, and willing to work hard, then your net wealth is likely near all-time highs and these are the people who move the needle on the economy.”

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As interest rates peaked in July 2023, it became widely feared that indebted and overburdened households would lead to a consumer slowdown that would sow the seeds for a recession in 2024.

In late July, these fears sparked a near 10% correction for U.S. stocks, as seen in the SPDR S&P 500 SPY exchange-traded fund that tracks the main S&P 500 index.

But, by the end of October, tech-fever caught hold of investors and stock markets rallied into 2024 and have, broadly, been rallying ever since.

Retailers reported robust sales over the Thanksgiving and Christmas holidays, despite warnings that consumers’ pockets were wearing thin due to high levels of indebtedness in the face of higher interest rates.

Interest rates are still where they were then. But the U.S. consumer appears to still be in good shape. How can this be after all the warnings?

In January, Benzinga interviewed Scott Shellady, better known on Wall Street as the Cow Guy, who said the consumer was the “weak link” and that markets faced a downturn.

“Consumers have moved from their pandemic savings, to their actual savings, then they went to credit cards, then to home equity lines of credit, then to their 401(k)s, and now they're doing buy-now-pay-later,” he said, predicting a “market reckoning.”

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