More Subprime Borrowers Are Missing Loan Payments 

What is it? 

“Consumers with low credit scores are falling behind on payments for car loans, personal loans and credit cards, a sign that the healthiest consumer lending environment on record in the U.S. is coming to an end.”**

“The share of subprime credit cards and personal loans that are at least 60 days late is rising faster than normal, according to credit-reporting firm Equifax Inc. In March, those delinquencies rose month over month for the eighth time in a row, nearing their pre pandemic levels.:”**

“Delinquencies on subprime car loans and leases hit an all-time high in February, based on Equifax’s tracking that goes back to 2007.”**

Why does it matter?

Our experience has shown that the Economic Cycle tends to repeat itself. The causes of an economic slowdown may be different but the symptoms are often similar. 

Normally, during an Economic Cycle peak, the job market runs hot as employers are trying to satisfy demand and are desperate for labor help. Wages increase at a faster rate and the consumer feels good about their financial situation. Spending peak which pushes inflation higher. That normally comes to an end eventually as corporations and consumers feel the pinch of higher overall costs, and starts to lower their consumption. It may also affect how some of us are able to pay for the things we purchased.

We may be starting to see how the current Economic Cycle is evolving from its peak. Our opinion is that we may be facing a stronger headwind than many are anticipating. 

For that reason, we are moving to the 401k Allocation #5. 

Update on the Tactical Diversifier Model – Matrix 

What is it? 

We think it is important to give an update on how we are managing risk within our models especially when the markets are as volatile as they are. Here’s a screenshot of the Tactical Diversifier Matrix as of 5/18.

Why does it matter?

When risk managing investments, it is important to create a portfolio of uncorrelated asset classes. As the markets fluctuate, some asset classes will gain in favor while others may lose momentum. Our goal is to add to the ones that are becoming stronger and lower the allocation to weakening asset classes.

Here are our observations:

The following asset classes are gaining momentum. We may add to the positions:

• SJB: Inverse High-Yield Fund
• TLT: Long-term Treasuries
• IEF: Mid-term Treasuries
• SHY: Short-term Treasuries
• AGG: Bond Aggregate Index
• LQD: Corporate Bonds

The following asset classes are stable

• GLD: Gold
• PDBC: Broad Basket of Commodities (Oil and more)

The following asset classes are losing momentum. We may reduce our allocation:

• FTSL: Senior Bank Loans

Our opinion is that we may have seen peak inflation. The late surge in inflation and the Federal Reserve’s comments about Fed Fund hike helped with the spike in interest rates since the beginning of the year.

As inflation subsides and if our prediction about the Economic Cycle is correct, we believe that we may see interest rates fall back towards where they have been over the last few years. We think it may be a more favorable period for our defensive bonds allocation.

Other articles we found interesting this week:

Dollar soars as Wall Street plunges

Stocks sink by most since June 2020 as retail results disappoint across the board

Global diesel shortages herald imminent economic slowdown

Current 401(k) portfolio

Our last portfolio reallocation: 5/19/2022. 

Want more information?

The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach. 

Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.

Click here for more details about our investment management

Sources:

*Emily McCormick. “Stocks sink by most since June 2020 as retail results disappoint across the board”. 5/18/2022. https://finance.yahoo.com/news/stock-market-news-live-updates-may-18-2022-221712104.html

**Anna Maria Andriotis: “More Subprime Borrowers Are Missing Loan Payments” 5/19/2022 https://www.wsj.com/articles/more-subprime-borrowers-are-missing-loan-payments-11652952602

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