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Here's Why Discover and Capital One Are Rising on Tuesday

By Matthew Frankel, CFP® – Apr 28, 2020 at 12:04PM

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The credit card-focused banks are among the market's top performers.

What happened

After a strong opening, the stock market was rather flat by midday on Tuesday. As of 11:30 a.m. EDT, the Dow Jones Industrial Average and S&P 500 index were both higher, but by less than 0.4% each. Credit card issuers were another story. Discover Financial Services (DFS -0.55%) and Capital One Financial (COF -1.61%) were both higher by nearly 8% on the day.

So what

To put things in context, it's important to realize that these stocks and many others in the financial sector have been among the hardest-hit during the COVID-19 pandemic. Even after the recent rebound, Discover and Capital One are down by 52% and 38% in 2020.

Person holding three credit cards in their hands.

Image source: Getty Images.

The reason for the poor performance is simple. Credit card debt is a "riskier" type of debt for banks, as opposed to say, mortgages or auto loans that are secured by a home or a car. Even in good times, it's not uncommon for banks to write off 3% or more of their credit card loans. During recessions, credit card default rates can spike -- during the financial crisis of 2008, the overall credit card industry net charge-off rate briefly spiked into the double digits.

Now what

That brings us to today's move. The U.S. economy remains mostly closed, but we're starting to see some reopening. And we're getting concrete dates for some future reopenings. For example, mall operator Simon Property Group (SPG 0.70%) announced today that 49 of its U.S. mall properties are preparing to reopen by May 4.

This is giving investors hope that the U.S. recession won't be as drawn-out as feared, and that most consumers will be able to pay their bills. While there's still a long way to go, it's looking more likely that a massive spike in loan losses could be avoided.

Matthew Frankel, CFP owns shares of Simon Property Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
COF
$92.17 (-1.61%) $-1.51
Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
SPG
$89.75 (0.70%) $0.62
Discover Financial Services Stock Quote
Discover Financial Services
DFS
$90.92 (-0.55%) $0.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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