We Can’t Have A Full Recovery Until This Happens…

We are now more than halfway through earnings season. Almost all companies are beating expectations, and analysts are raising estimates for the current quarter. Analysts are also noting strong earnings depend on continued good news related to COVID-19.

In the past few weeks, the number of new cases and hospitalizations have been dropping. That’s good news. But that’s not showing up in the economic data yet.

CNN’s Back-to-Normal index hasn’t changed much since October.

Source: CNN

This index looks at real-time data for airline travel, restaurant dining, and hours worked at small businesses, among other factors. These data points show changes in economic activity and in confidence.

A full economic recovery will require everyday life to be back-to-normal. I don’t think that will happen for some time, but I am hopeful that we get closer-to-normal in the next few months. News reports indicate that we are making progress towards that lower goal.

Policymakers are finally seriously addressing the question of how to reopen schools. Recent data shows that just 35% of students in the United States are attending in-person school and 42% are in districts where they are taught fully online. Even in-person schools frequently shut down to some degree after a positive test.

This is disrupting the lives of parents and preventing many parents from getting back to work. But now that efforts are underway to get students back in classrooms around the country, the back-to-normal index might get above 90% and the economic recovery could become stronger.

How I’m Trading Right Now

As I dig deeper into the data, I am certain we will see a K-shaped recovery with some families struggling as others prosper. This is always the case, but the division of the upper and lower legs of the K is growing. This will create interesting investment opportunities.

For example, I recently made a trade recommendation that will benefit from the upper slope of the K with American Express Company (NYSE: AXP).

The company notes that American Express Cardmembers spend more money, on average, than any other credit card holders. According to their research, Cardmembers spend on average 43% more than non-Cardmembers and have higher than average incomes. These are the consumers who are likely to spend even more as the economy recovers.

Cardmembers pay AXP for the privilege of having a card, and annual fees are among the highest in the credit card industry. But members also get rewards for spending, so the company does have costs associated with membership.

AXP also generates fees whenever a member spends. Merchant fees are relatively high for credit cards. AXP charges fees of 2.5% to 3.5%, according to some sources, well above the 1.5% to 2.5% fees for other cards.

This indicates AXP is likely to benefit from the economic recovery. The stock is likely to outperform the broad stock market. The chart below shows AXP with the Dow Jones Industrial Average (the black line).

Action To Take

In general, AXP and the Dow have moved in the same direction for most of the past five months. In the most recent rally, AXP bottomed ahead of the Dow after reporting better than expected earnings. This short-term strength should help the stock beat the market in the next few weeks.

In the bottom panel of the chart, you can see that my Income Trader Volatility (ITV) indicator is on a “buy” signal for AXP. The chart also shows there is significant support around the $105-$110 level. These factors make a short-term trade attractive.

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