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Here's Why Discover Financial Services Is Rising on Wednesday

By Matthew Frankel, CFP® – Jun 3, 2020 at 12:25PM

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The economy is reopening quickly, and credit card lenders could avoid massive losses.

What happened

The stock market was having a strong day on Wednesday. As of 11:45 a.m. EDT, the Dow Jones Industrial Average and S&P 500 benchmark index were up by 1.7% and 1.1%, respectively.

However, that move is relatively minor compared to credit card lender Discover Financial Services (DFS -0.55%), which is more than 7% higher on the day. Other credit card stocks are higher as well, with American Express (AXP -2.09%) and Capital One (COF -1.61%) both higher by 6%.

Couple shopping online with a credit card.

Image source: Getty Images.

So what

Credit card stocks were some of the hardest hit in the coronavirus bear market, and it's easy to understand why. Credit card lending is one of the riskiest types of lending banks undertake -- in good times, it's not uncommon for credit card issuers to have charge-off rates in the 5% range. In bad times, defaults could easily rise into the double digits.

The reason for the sharp rebound in these stocks recently has been generally strong news when it comes to the economic recovery in the United States. For example, Visa (V -1.34%) recently reported that U.S. payment volume only declined by 5% year over year in May, a sharp recovery from the 18% decline in April.

Just today, we learned that private payrolls fell by significantly less than expected last month, and service-sector activity was stronger than expected. And as state economies continue to reopen, we're still not seeing any significant jump in COVID-19 case numbers. In fact, according to Johns Hopkins, the case numbers continue to trend downward in the U.S. as a whole. And only a handful of U.S. states are seeing any uptrend at all.

Now what

The bottom line is that the data coming out continues to indicate that consumers might be in better shape than previously thought and that state reopening plans remain on track. This is very positive news for all financial-sector stocks and especially for credit card lenders like Discover.

Matthew Frankel, CFP owns shares of American Express. The Motley Fool owns shares of and recommends Visa. The Motley Fool has a disclosure policy.

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Stocks Mentioned

American Express Company Stock Quote
American Express Company
AXP
$134.91 (-2.09%) $-2.88
Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
COF
$92.17 (-1.61%) $-1.51
Discover Financial Services Stock Quote
Discover Financial Services
DFS
$90.92 (-0.55%) $0.50
Visa Inc. Stock Quote
Visa Inc.
V
$177.65 (-1.34%) $-2.41

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

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