The credit cycle, as well as the business cycle in the United States economy, is getting underway for a major pivot coming into 2024. Whether you are a long-term investor or enjoy dabbling in and out of markets in trading, this new cycle could bring you several potential opportunities for your money to be deployed.
You see, now that earnings season has kicked off for the year, many looked to the major banks to understand where investors and everyday consumers stand today and where they are likely to go next. This includes insights from banks like Bank of America (NYSE: BAC), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC).
Much more detail from the masters of the universe in a bit, but for now, all you need to know is that credit card delinquencies are on the rise, and these banks are writing down heavy losses. Investment dollars will likely flee to a safer space in the consumer credit industry, where names like American Express (NYSE: AXP), Mastercard (NYSE: MA), and Visa (NYSE: V) shine.
What is going on?
George Soros famously put out his theory of reflexivity, another branch of behavioral economics, describing the way that psychology plays a huge part in how financial markets react and behave during business cycles. So, what is the average consumer doing today?
During the 2020-2022 years affected by the COVID-19 pandemic, the United States FED was forced to drop interest rates to zero. This made borrowing money easier - and cheaper - than ever for everyone, no matter their credit worthiness.
As always, these periods tend to form bubbles, and credit cards got so inflated then that the adverse effects begin to show their face today. People who took on debt when it was easy and cheap fell into the continuation fallacy that times would remain easy forever.
When the FED hiked interest rates through 2023, this became a rude awakening for many. Now, delinquencies are on the rise, according to the main commercial banks in the country, as these same borrowers are having a harder time repaying their credit lines.
According to Bank of America's latest quarterly financials, the bank saw a net charge-off (loans that are considered lost due to delinquency) increase from $689 million to $1.2 billion in twelve months, a bit concerning. Citigroup and Wells Fargo followed a similar trend with increases in these accounts.
In Citigroup's results, management points to 3.8% of all loans being a charge-off, increasing from 2.2% a year prior; this represents an increase of $700 million. More than that, the bank expects 5.0% unemployment in the U.S. in 2024. Wells Fargo posted a rise of $692 million in charge-offs as well.
The buck stops here
Knowing what you know now, looking at the consumer credit industry for good investment ideas is probably not the best idea. This is precisely why you should look in here for opportunities because if everyone has the same negative perception, then your payoff could be amplified by being a contrarian.
Because these loans are a game of hot potato, your goal is to get in the middle of the flow between consumer activity and the receiver of the risk, which is usually these same banks posting losses in this department. So, to get in between, you should start looking at the middlemen, also known as Visa and Mastercard.
There has to be a reason why analysts are projecting 16.4% earnings per share growth in Mastercard for the next twelve months and are just as bullish by pumping Visa with a projection for 12.6% growth in the coming year. While not crazy figures, these growth rates are all the more important considering the size of these companies.
This perceived safety comes from the business models themselves, but what about American Express, which typically holds the potato at the end of the credit line cycle? Well, the brand itself is a protection factor against these falling consumer fundamentals.
Because of American Express's exclusive business model and rigorous approval process that only accepts the best of the best FICO scores and consumer profiles, a fallout in delinquencies is likely to have only a minimal impact on the company's ability to collect payments.
If that doesn't make it a safe bet, then you'd be going against analyst EPS growth projections of 10.6% for the next twelve months.
