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Here's Why Amex, Discover, and Capital One Are Soaring on Tuesday

By Matthew Frankel, CFP® – May 26, 2020 at 12:10PM

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Credit card stocks are among the market’s best performers in the post-Memorial Day rally.

What happened

The stock market is having an excellent start to the short trading week on Tuesday. As of 11:20 a.m. EDT, the Dow Jones Industrial Average was up by 2.7% and the S&P 500 index was above 3,000 for the first time since early March.

Throughout the stock market rally since hitting bottom in late March, we've seen financial stocks -- particularly credit card companies -- outperform the market on strong days, and Tuesday wasn't an exception. American Express (AXP 3.88%) was nearly 6% higher on the day, while Discover (DFS 3.74%) and Capital One (COF 4.50%) were doing even better, up by 7.6% and 7.8%, respectively.

Two young women paying with credit card.

Image source: Getty Images.

So what

There were a few reasons the stock market was higher on Tuesday.

First, investors are becoming more hopeful that a coronavirus vaccine will become widely available by the end of 2020 or in early 2021. Novavax (NVAX 4.30%) announced that its vaccine candidate was entering human trials, and this comes on the heels of Moderna's (MRNA 3.87%) strong preliminary results, announced last week. There are now 10 vaccines in human trials, and investors seem quite confident that one or more will help bring the pandemic to an end.

Second, while economic activity is still far from prepandemic levels, many experts have been surprised to see how quickly things like credit card spending and air travel are starting to come back. And in states that have been reopened for some time, there have been some upticks in COVID-19 cases, but no major spikes, as many had feared.

Finally, May's consumer confidence numbers were just released, and the reading of 86.6 came in far better than the 82.3 that economists had been expecting. In short, this shows that consumers might be in better financial shape than previously thought, and pent-up demand could help get the economy back on track sooner than anticipated.

Now what

So why is this news moving credit card stocks in particular? In a nutshell, these three things could indicate that the economy will normalize quicker than expected and consumers might be more willing to spend money than originally thought.

While the credit card business is obviously more complicated than can be explained in a paragraph or two, there are two main things that need to happen for credit card issuers to remain profitable. First, consumers need to be willing to take on debt -- this is where the higher-than-expected consumer confidence and rebounding economic activity come into play. And second (and most importantly), consumers need to be able to pay their bills. Nothing can sink a credit card issuer, or any bank for that matter, faster than a massive spike in loan losses. And if the economy rebounds more quickly than many fear it will, it could help credit card lenders like these three avoid an unmanageable spike in defaults.

The bottom line is that any news that indicates the economy is getting back on track is positive news for credit card issuers. And the market is getting quite a bit of it right now.

Matthew Frankel, CFP owns shares of American Express. 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

American Express Company Stock Quote
American Express Company
AXP
$145.46 (3.88%) $5.44
Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
COF
$99.87 (4.50%) $4.30
Discover Financial Services Stock Quote
Discover Financial Services
DFS
$97.40 (3.74%) $3.51
Novavax, Inc. Stock Quote
Novavax, Inc.
NVAX
$19.40 (4.30%) $0.80
Moderna, Inc. Stock Quote
Moderna, Inc.
MRNA
$125.67 (3.87%) $4.68

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

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