What happened
The stock market was sharply higher on Monday morning, erasing some of last week's losses. As of 11 a.m. EDT today, the Dow Jones Industrial Average and S&P 500 were both about 4.5% higher.
Payment stocks were doing even better. Payment processing giants Visa (V 0.05%) and Mastercard (MA -0.08%) were both up by more than 7%, PayPal (PYPL -1.14%) was up by about 5.5%, and American Express (AXP -0.84%) was having a particularly strong day with an 11% gain.
Image source: Getty Images.
So what
The coronavirus outbreak and subsequent shutdown of many parts of the U.S. economy have been particularly harsh on companies in the payments space.
In the cases of Visa and Mastercard, both companies earn the bulk of their revenue by collecting a small percentage of the payment volume flowing through their massive networks. Because consumer spending has fallen since the pandemic began, and will likely remain depressed for some time, it's no wonder these stocks have been hit hard. PayPal is in a similar situation, making most of its money by facilitating payment transactions.
American Express not only makes its money by processing payments, but also acts as the lender. Known as a closed-loop payment network, American Express lends money directly to its credit card customers. So, in tough times, not only does Amex get hurt from a drop in payment volume, but it also has exposure to consumer credit. If customers start having trouble paying their bills, it could result in steep losses for the company.
So, why are these stocks doing so well today?
In a nutshell, we're starting to see the first positive coronavirus news in over a month. We've seen good news on the financial side of things, such as with the $2 trillion stimulus package, but not when it comes to the virus itself. Specifically, over the weekend we saw clear signs of slowing case increases and death rates in Italy and other hard-hit areas in Europe. And the 594 coronavirus deaths reported by New York State on Sunday were the first daily decrease we've seen.
Now what
These developments seem to be giving investors hope that the COVID-19 pandemic might not keep the economy shut down for as long as feared, and therefore the recession could end up being short-lived. Payment volumes could return to normal levels sooner, and loan delinquencies might not be as bad as investors thought.
Having said that, it's important for investors to realize that we're not nearly out of the woods yet. The coronavirus hot spots around the world are still hot spots, and people are still dying of COVID-19 both domestically and abroad at alarming rates. And from an economic standpoint, it's very unclear at this point when daily life could start to return to normal.
The bottom line is that we're starting to see some good news, which could indicate that we might be able to avoid keeping the economy shut down through the summer. But there's still a long way to go in the battle against the terrible pandemic, so investors should expect a roller coaster ride in these (and other) stock prices for the foreseeable future.
