In roughly a week, America will return to the polls for midterm elections — assuming they haven’t taken part in early voting.
Two years have passed since we voted on a new president, and most Americans are taking a moment to reflect on how their lot has improved during that time. Or examine as to whether it has gotten worse.
In a recent Bankrate survey, only 38% of Americans believe their finances have improved since the 2016 election.
Forty-five percent say their finances are unchanged, while 17% of Americans responded that their situation has actually gotten worse.
As we dig below the surface of impressive gross domestic product (GDP) numbers and extremely low unemployment rates, we find a growing financial gap that could cause massive problems for the economy as we head into 2019.
A gap that could have investors scrambling for cover if they are not prepared.
Missing the Boat
How could anyone not love the economy right now? It’s a time of wine and roses.
The third-quarter GDP came in at 3.5%, following the second quarter’s stunning 4.2% growth. That’s the fastest pace of growth for six months in more than four years!
The unemployment rate sits at 4% and is hovering at its lowest levels since 1969. Employers are struggling to find people to fill positions.
But the problem lies in where the financial growth is actually coming from when it comes to your bank account.
Middle-class wages have been largely stagnant during this period of economic growth. President Donald Trump’s tax cuts largely helped the upper class and businesses.
Much of the financial growth enjoyed since the 2016 election has come from the stock market. Even with the recent market turmoil, the S&P 500 Index is up more than 20% since November 2016.
However, only 54% of Americans own stocks, and that’s including those with 401(k)s, mutual funds and IRA accounts.
Too much of America has been left behind in the latest economic boom, and it is creating a problem that will derail further gains.
A Sinkhole of Debt
While a portion of Americans have enjoyed the recovery, too many people have come to rely on credit cards to maintain their lifestyle. Debt is on the rise.
Consumer debt is set to hit $4 trillion by the end of 2018.
Americans currently owe 26% of their annual income to debt. That’s up from 22% in 2010.
Right now, consumers are shelling out 10% of their income to pay down this debt, which is down from 12% to 13% from 2000 to 2008.
But the dangerous thing is that interest rates are on the rise in America. The Federal Reserve has boosted rates three times this year and is poised to raise them another 25 basis points in December.
Interest rates are now at their highest point since 2008. And each time rates rise, we see an increase in interest rates for credit cards.
As Americans continue to tally up more debt, they will also be paying out larger and larger amounts of their income on just the interest payments.
And that is where the slowdown begins.
If wages aren’t growing, Americans are left to depend too heavily on their credit cards to make ends meet.
As interest rates rise, they fall farther behind until it all comes tumbling down.
Make Portfolio Changes Now
There’s an old saying: “A rising tide lifts all boats.” The only problem is that too many people have missed the boat in the first place.
The lower and middle classes have largely been left behind in this recovery. The financial growth that all Americans would have enjoyed needed to come in the form of wage growth. If too much is coming from the stock market, a large swath of Americans is left behind and simply can’t catch up.
As a result, we see growing debt … and eventually, a drop in consumer spending, which helps to keep the economy alive and kicking.
For 2019, we are facing a troubling year regardless of how the midterm elections go. While the economy on the surface might look rosy, there are problems brewing just under the surface that will start to have a larger impact on the economy and the stock market next year.
To protect your portfolio, make sure that you are diversified across the various sectors and asset classes to better weather the rocky market that is coming.
Editorial Director, Banyan Hill Publishing