Recent credit card spending data and earnings from major banks paint a troubling picture for the consumer. It continues a recent theme of the stock market being oblivious to the real-world consequences of the coronavirus and subsequent, rolling shutdowns.
About 70% of the U.S. economy is based on consumer spending. The credit card data shows serious damage to household finances. In past recessions, consumer spending bouncing back marked the lows. It will bounce back due to population growth and the healing of time passing. Given the severity of the damage and likely psychological effects, there's a higher possibility of a longer and slower recovery than previous recessions.
Consumers Are Hurting
Over the past month, the economy has shed more than 20 million jobs. Of course, while the economy has essentially "stopped", the financial economy keeps going. Therefore, people still have to pay their bills. Historically during times of stress, they prioritize rent, mortgages, utilities, car payments, and medical bills. Nowadays, it's probably safe to add phones and Internet bills.
Credit cards are typically the item that sees the most delinquencies during recessions. Major banks have already increased reserves in anticipation. They have insight into people's credit card balances as well as their bank accounts. Further, lenders tied to the middle class like Capital One Financial
All of the companies in the credit card space are seeing their stock prices hit to varying degrees. Companies like Visa
It's interesting to note that even as the S&P 500
This is an important sector to watch going forward as it's the most sensitive to improvements or deterioration in terms of consumer spending. It's also worth keeping an eye on as the broader market's upside is limited if the consumer is struggling. Given that the U.S. economy is primarily driven by spending, consumer weakness will likely infect and spread to other sectors.
