The Federal Reserve's monthly report on consumer credit showed revolving credit, mostly in credit card debt, rose $9.6 billion in July with total consumer credit climbing $10.4 billion for the month.

The key piece of context for this was US credit card debt passing the $1 trillion mark in June, and related interest rates hitting the highest level in over 20 years.

The July consumer credit report tells us consumers continued to turn to credit cards to fuel their buying, while the recent July Personal Income & Spending report showed the personal savings rate fell to 3.5%, one of the lowest in the last 13 years.

This tells us that disposable income is already coming under additional pressure ahead of the return of student debt payments in October. We've shared some expectations for what that impact could look like, and we have a new one from research firm BTIG. The firm surveyed 1,000 borrowers an found 82% of them will resume paying back loans in the coming weeks with the expected average monthly payment between $250-$300. Others have put that figure closer to $400 per month.

What we do know is that for the ~45 million student loan borrowers in the US, roughly 17% of the US population over 18 years of age, their disposable income will fall.

To this we can add the following warnings from the Consumer Financial Protection Bureau warned:

  • "About one-in-five student loan borrowers have risk factors that suggest they could struggle when scheduled payments resume."
  • "More than one-in-thirteen student loan borrowers are currently behind on their other payment obligations. These delinquencies are higher than they were before the pandemic."

In its survey, to deal with additional income pressure, BTIG found its respondents would look to dine out less or reduce their spending when eating out.

As we think about this and where we've seen continued strength in consumer spending, this not only makes sense to us, but also supports our Action Alerts PLUS positions in Costco (COST) , PepsiCo (PEP) , Chipotle (CMG) and McDonald's (MCD) . Costco and PepsiCo will benefit from the shift back to eating at home more while Chipotle and McDonald's benefit from consumers looking for more affordable options compared to casual dining such as Red Robin Gourmet (RRGB) or those offered by Darden (DRI) , including Longhorn Steakhouse, Olive Garden, Seasons 52, and others.

With MCD shares trading below our average cost basis of $289.28, we will add to the position.

We recognize the August CPI report is ahead of us but here is our thinking: if August core CPI comes in warmer than expected, the thought rates could go even higher will translate into even greater pressure on disposable income. If the August core CPI is cooler than expected, we are likely to get a nice move in the market. Given those outcomes, we are opting to pick up some additional MCD shares today.

After you receive this Alert, we will buy 45 MCD shares at or near $279.75. Following the trade, MCD shares will account for roughly 2.6% of the portfolio.

(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)