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Consumer stocks have slumped as investors show more discretion on spending. As questions mount around when the Federal Reserve will lower interest rates from a 23-year high, signs of consumer stress are emerging and, if continued, could spell trouble for the stock market.

Meanwhile, recent data shows that consumers' incomes and spending are still growing, but their spending is outpacing their income, indicating more stress, said Mace McCain, chief investment officer at Frost Investment Advisors.

"The thing we'd watch is when does unemployment rise. Because if unemployment starts going up and job insecurity starts going up, then that would typically cause the consumers to pull back," McCain said. "We'll be watching the jobs numbers for when that stress actually translates into consumers spending less and slowing the economy."

Homeowners who weren't able to lock in mortgage rates in the 3% to 4% range are experiencing the most stress, McCain said. On the other hand, higher earners and those with the highest amount of wealth are spending at a healthy pace, motivated by the positive returns in the stock market and the still high housing prices, noted McCain.

Excerpted from MarketWatch on May 5, 2024. To read full article, click here.