What happened
This week, shares of the payments and credit card company American Express (AXP 0.15%) traded roughly 10% lower as of 1:28 p.m. Thursday, as the market digested the Federal Reserve's recent interest rate hike and the economic outlook.
So what
The Fed significantly raised its benchmark overnight lending rate by 0.75% on Wednesday. A hotter-than-expected inflation report for May forced the agency to raise interest rates more rapidly than initially expected in its bid to bring down consumer prices, which have surged this year.
Revolving debt, which is mostly credit card debt, continued to grow nicely in April, according to Fed data, but there are signs that consumer spending is starting to slow, as inflation persists and the cost of debt climbs.
As a bank and credit card company, American Express' business is cyclical. In a down economy, the lack of consumer spending will hurt growth, and a higher cost of debt could also lead to increased credit card losses.
Now what
Although there is a very real likelihood of a recession sometime later this year or in 2023, there is still no indicator that it will be a severe recession. The consumer has been relatively healthy up until recently, and inflation could still start to peak soon.
American Express also has one of the most desired brands in the credit card business, and it has tremendous customer loyalty, so I would expect the company to be able to ride out any kind of recession.
American Express' valuation is good, historically speaking, at about 14 times forward earnings, and it presents a good opportunity to buy the stock.
