Will Lack of Credit Impair Holiday Sales?

While stocks still seem to be poised to extend the monster rally that began in March, the S&P 500 index has encountered strong resistance over the last six weeks just above the 1100 level.  Recent trading has been all about the value of the U.S. Dollar: stocks have been weaker on dollar strength, and have rallied on dollar weakness. What might be the catalyst that allows the market to break out of the recent trading range? We think it is likely to be the strength of the holiday shopping season, which begins in earnest on Friday.

While most observers expect sales this season to be better than 2008's disastrous results, forecasts are rather subdued. For example, the CEO of Target Corp. commented that he expects a highly promotional season to entice reluctant shoppers. With expectations low, stocks are likely to resume the rally if sales are strong this weekend.

However, recent research by financial services analyst Meredith Whitney on credit card capacity suggests that consumer spending will be significantly impacted by reduced purchasing power. As the chart below shows, banks have cut credit card lines by $1.2 trillion, a huge reduction in credit availability. Whitney expects a further $1.5 trillion reduction in credit lines, and the loss of access to credit will accelerate in 2010. The reduction in credit has occurred at a time when consumers are increasing their utilization of credit cards to fund expenses. How can consumer spending continue to drive 70% of the economy when credit availability has been so severely restricted?