After falling over 28% at the onset of the Covid-19 pandemic, Visa (NYSE:V) shares are within 3% of where it started at the beginning of the year. And there are many who are suggesting that V stock is a buy on the dip candidate. That may be premature.
Analysts are beginning to digest the effect of the national lockdown on consumer spending. Visa reported a 19% decline in payment volume through the end of April. However, David Moadel points out that closer examination is showing that consumer spending may not have decreased as much as shifted.
I can understand that. My personal spending has shifted largely because my two college age students (and their appetites) have been home with me two months earlier than I had planned.
But I see several delivery trucks move through my neighborhood every day. Support for that anecdotal evidence comes from Visa’s report of a massive leap in e-commerce. And according to Credit Karma, 35% of Americans have made impulse buys to cope with the stress of the pandemic.
All of these would seem to be massively bullish signs for V stock. But it could be a case of short-term gain hiding long-term pain.
The law of unintended consequences always lurked in the shadows of this lockdown. There is mounting evidence that many small businesses are not going to reopen. And that means that it’s becoming harder to know how many of the over 20 million jobs that have already been lost are coming back. And if the United States is headed for a jobless recovery, then consumer spending will decrease.
Recovery Estimates May Have Been Too Optimistic
There was a lot of hope put into a belief that the U.S. economy would have a V-shaped or at least a U-shaped recovery. That makes sense. The theory goes that these job losses were not created by a loss of demand, but due to a public health emergency. So, when businesses get the green light, they would simply rehire all the employees that were laid off or furloughed.
But now Minneapolis Fed President Neel Kashkari is saying a “V-shaped recovery is off the table” and that the economy will be “nowhere near back” to where it was in December 2019.
The Reopening Is Happening Too Slowly for Many Small Businesses
It’s one thing to have a chain department store close for an extended period of time. It’s another thing when it’s a small, local business. If you haven’t yet, you’ll probably see or receive a GoFundMe request from one of your local businesses. I did, and that’s what prompted me to do a little digging.
Lest you think I’m exaggerating the issue, let me share the results of two surveys that are referenced in a recent Seeking Alpha article. The first is from the Society for Human Resource Management (SHRM).
On May 6, 2020 SHRM released a report compiling data from its interviews of 375 small business owners. According to respondents, 42% of small businesses have already decided to close their businesses. And 52% expect to be out of business in six months. 41% report a loss in revenue of over 30% and 13% report a complete loss of revenue.
Another survey of 5,850 small business owners from Main Street America paints an equally disturbing picture. Nearly two-thirds of the businesses that responded indicated that their business would be at risk of closing permanently if sales disruption continued at current levels for up to five months. Over 30% responded that the window for closing was shorter than that. They said they would be at risk with a disruption as short as two months.
The bottom line is that privately owned small businesses are the primary income source for many U.S. households. And that source appears to be in significant jeopardy.
But What About the EIDL and PPP Loans?
The Seeking Alpha article went on to cite a survey from the National Small Business Association (NSBA). According to the survey only 23% have received approval for the full amount they requested for their PPP loan. And 23% have not received any notification of their application status. A friend of mine who works in commercial banking texted me saying that the process was…challenging (he used more colorful words).
What Does This Mean for V Stock?
In a recent article about Mastercard (NYSE:MA), my colleague Josh Enomoto wrote that the payment processor may be approaching a day of reckoning regarding credit card delinquencies. It seems to me that the same may be true for Visa.
But even if Visa does not face defaults, it is becoming more likely that consumer spending may be slowing down. I’m an optimist (and capitalist) by nature. Nobody is rooting harder for the economy. But the deck was stacked against small businesses when this started. Visa will still be accepted at many retailers, but many retailers may find that they have fewer customers.
As a long-term investment, I like Visa stock. There seems to be a war on cash, and Visa will be one of the winners. But in the short- to medium-term that war on cash will produce casualties. And that includes consumers who are likely to use Visa products. That’s why if you’re looking for short-term growth there are better options right now.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
