On the surface, everything seems to be going right for credit card giant Visa (NYSE:V). For starters, V stock is up nearly 38% year-to-date, contradicting its stereotypical image as a safe, boring equity. With a booming economy and rising consumer sentiment, shares seem destined to maintain its upward trek.
Additionally, recent data from Black Friday and Cyber Monday only reinforce the bullish narrative for Visa stock. As USA Today reported, Americans spent a record amount for this year’s Black Friday. For retailers, they witnessed a surge in brick-and-mortar and online sales. In fact, for in-store purchases, the total tally increased over 4% from 2018 sales.
That’s particularly impressive for retailers, which counters the popular idea that physical retail outlets are dying due to irrelevancy. Plus, fewer Americans are carrying cash, which bolsters the case for V stock, along with rivals such as Mastercard (NYSE:MA) and American Express (NYSE:AXP).
Interestingly, shoppers this year were willing to put on the miles for a discount. And thus, Visa stock potentially gets a two-fer: an increase in transportation-related revenue along with the retail purchase.
But the biggest catalyst for both Black Friday and Cyber Monday was shoppers’ growing confidence in smartphone and tablet usage. This trend added another reason to open up the wallet. Of course, online shopping is virtually the exclusive domain of credit cards.
Specific to Cyber Monday, research firm Adobe Analytics expected online sales to hit $9.4 billion. That would represent a near 19% lift from 2018’s tally. Needless to say, such a haul would be an all-time record.
Again, the holiday sales trends all bode incredibly well for V stock. So, why did shares suddenly shed 1.5% on Monday?
Consumer Sentiment Not Confirming V Stock
Generally, President Donald Trump’s tweets declaring that the U.S. will reimpose steel and aluminum tariffs on Brazil and Argentina sent jitters. First, the news was unexpected, sending many political insiders scrambling – a not unusual scene in the Trump White House. Second, the economy isn’t so fail-proof that we can afford to haphazardly make new enemies.
With Visa stock acting as a bellwether, stakeholders probably saw this as a cue to dump shares. Although a significant event, it’s not the one that I’m most worried about regarding V’s recent selloff.
Instead, it’s consumer sentiment: yes, the very factor that has acted as a tailwind for V stock over the past several years. Specifically, the consumer sentiment index is sliding while Visa shares continue trekking higher. In other words, sentiment is not confirming the bullishness in Visa stock.
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Between March of 2008 through October of this year, the correlation coefficient between consumer sentiment and V stock is 88%. That’s an incredibly strong statistical relationship, and one you would naturally expect: if the consumer is confident, the plastic (a debt instrument) enjoys higher demand.
But since 2017 – coincidentally the beginning of the Trump administration – Visa stock has enjoyed tremendous demand. However, consumer sentiment is not keeping up. In fact, it’s moving down rather sharply this year compared to last. Thus, we have an inverse relationship: V is moving higher, but consumer sentiment is weakening.
What gives me pause is the unusual nature of this trend. Since Visa became a publicly traded equity, it has closely tracked consumer confidence. Again, you would expect this relationship. But that all changed once Trump took office.
Am I blaming him for this phenomenon? No. One person can only do so much. But something is happening here, suggesting a cautionary approach.
Don’t Overreact, but Don’t Be Oblivious
To be fair, the latest read of consumer sentiment at the time of this writing is for October 2019 data. Thus, we should expect a big boost for November.
That said, I’m analyzing long-term annual data. Therefore, no one month will likely make or break the entire year. So, from a reasonable perspective, investors shouldn’t overreact to the information I’m bringing to the table. In no way, for example, am I advocating for shorting V stock.
At the same time, you shouldn’t ignore the hard evidence. Visa stock has enjoyed tremendous success in the markets, but now, the consumer isn’t following suit.
Therefore, I’m looking at shares as a cautious hold. Clearly, the bullish case for Visa has merit: just look at the resounding sales from the holiday kickoff. But don’t get too comfortable as shares could also face some turbulence down the road.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
