What happened

The stock market is having a rough day today, with the Dow Jones Industrial Average and S&P 500 index both down by about 2.7% as of 11:50 a.m. EDT on Wednesday.

Credit card stocks were getting hit especially hard. Payment processing giant Visa (V 0.09%) was down by 4.5%. Credit card issuers and payment processors Discover Financial Services (DFS 0.49%) and American Express (AXP 0.62%) were lower by 8% and 6%, respectively. And Capital One (COF 0.54%), a bank focused on credit cards, had fallen by nearly 6% as well.

Woman shopping on mobile device and holding credit card.

Image source: Getty Images.

So what

There are two major catalysts for today's negativity in the credit card space: economic data and bank earnings.

First, we got some key economic data on Wednesday, and to say that it looks bad would be an understatement. March retail sales fell by 8.7%, the most they have ever fallen in the 28 years the U.S. has tracked them, and significantly worse than the 8% drop economists had predicted. Manufacturing and industrial production data was ugly as well and generally worse than expected.

Obviously, low retail-sales activity is bad for companies that make their money based on consumer spending. Visa, American Express, and Discover all get a small percentage of the transactions processed on their payment networks (swipe fees), so lower spending can hurt revenue.

Second, while much of the information in bank earnings reports wasn't terrible, all of the major banks added billions to their loan loss reserves in the first quarter, and the build was greater than expected in most cases. For example, JPMorgan Chase (NYSE: JPM) set aside $8.3 billion for loan losses in the first quarter, a staggering $6.8 billion more than in the same quarter last year.

This indicates that banks are bracing for a wave of loan defaults. Credit card loans are a rather sensitive type of debt when it comes to recessions, so this could be telling investors that companies with large credit card loan portfolios like Discover, American Express, and Capital One could get hit worse than expected in the current economic climate.

Now what

Visa is purely a payment processor and doesn't actually lend money to credit card customers, which explains why it's performing the best out of this group. Capital One has more exposure to other (less sensitive) types of lending, and American Express has a higher-quality credit card loan portfolio compared with other major issuers, which is why the two are getting hit less than Discover.

At this point, nobody knows how deep the recession will be or how much difficulty consumers will have paying their bills. The stimulus payments and enhanced unemployment benefits could help consumers keep their accounts current, and most credit card issuers have indicated a willingness to allow customers to suspend payments during tough times. But even these massive efforts might not be enough if the pandemic lasts longer than expected. It's just too early to tell. Until we start seeing some concrete figures on loan losses and delinquencies (not just reserve builds), I'd expect quite a bit of volatility in these and other credit card stocks.