Can the S&P 500 continue soaring in 2024? It has been having a great year in 2023, rising a an impressive 23%. Many investors are bullish, hoping there may not be a recession.
Plus, the Federal Reserve has said there could be as many as three interest rate cuts ahead, which would be good for stocks as bonds become less attractive (leading investors to pile more money into equities). It also decreases the cost of borrowing.
But before you load up your portfolio with growth stocks, there’s one concerning number that could derail all those hopes for 2024. And that’s credit card debt.
Credit card debt is at record levels
Standing at over $1 trillion, credit card debt is now at a record level. Inflation is a big reason, but consumers have also continued to spend this year, despite rising prices.
A decline in the interest rate next year may help with mortgage rates and housing costs, but credit card rates are going to remain high. And that debt still needs to be paid off.
It’s always a concern when consumers start hitting record numbers in credit card debt at a time when the economy isn’t in great shape. The minimum payments consumers need to make on their cards will increase, leading to less disposable income.
The situation could get even worse
What’s even more concerning is a trend called “doom spending,” where young adults aren’t concerned about economic conditions and continue spending as a way to deal with stress. That can result in even greater credit card balances down the road.
Another trend that investors should watch for is the growing popularity of buy now, pay later (BNPL) services. Data from Adobe Analytics indicates that BNPL purchases rose 43% year over year during Cyber Monday.
BNPL services can allow someone to spread out a purchase into four payments, which could span months. And approval for BNPL services doesn’t often require a hard credit check, potentially allowing already heavily indebted consumers to take on even more debt.
It doesn’t matter if interest rates fall. If consumers are up to their eyeballs in debt, that’s a huge problem. As all these bills come due, the amount of available discretionary spending could be minimal next year. While it would be great if there is a soft landing in 2024, the growing debt problem is one that investors shouldn’t ignore as it could impact businesses across the board.
What investors can do to minimize their risk
If there’s a recession next year and the S&P 500 starts to unravel, it may be the big tech stocks, the Magnificent Seven, that feel the brunt of it. They’ve been propping the index up this year and have also climbed to high valuations, potentially making them vulnerable to corrections next year.
A safer strategy for investors than buying growth stocks would be to target value stocks that also pay dividends. They can make for more stable investments in myriad economic conditions.
The Schwab U.S. Dividend ETF (SCHD 0.08%) is a good example. Some of the top names in this fund include Home Depot, AbbVie, and Coca-Cola. These are blue-chip stocks that have solid financials and pay dividends.
Unsurprisingly, as investors have swarmed toward growth stocks, the Schwab fund’s total returns (including dividends) have been relatively modest at just 4% this year. The S&P 500’s total returns are significantly higher at 26%. But in 2022, when the markets were crashing, the fund’s total returns were only a negative 3%, whereas the broader index was down 18%.
In tougher conditions, a well-balanced fund such as the Schwab U.S. Dividend ETF can provide investors with a bit of safety. It’s a great investment to consider if you’re worried about what might happen in the markets next year or you just want a long-term investment to put in your portfolio and not worry.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Home Depot. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe, long January 2024 $47.50 calls on Coca-Cola, and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.
