Capital One's stock fell more than 6% on Monday following a controversial proposal from former President Donald Trump that could significantly impact the credit card industry. Trump called for a one-year, 10% cap on credit card rates, set to take effect on January 20. While this measure requires Congressional approval, Trump warned on Sunday that banks would be "in violation of the law" if they did not comply by the deadline.
The announcement comes as no surprise given Trump's past criticisms of high credit card rates, a key issue during his 2024 presidential campaign. Previously, bipartisan efforts have attempted to introduce bills to limit credit card interest rates to 10%, a rate far below the current average of 19.65% as reported by Bankrate.
Alongside Capital One, other credit card providers like American Express, as well as buy-now-pay-later companies like Affirm, experienced a downturn in their stocks due to the news. Wall Street analysts have expressed skepticism regarding the feasibility of Trump's proposal. JPMorgan labeled the cap as a "high-severity, low-probability risk" and suggested it could dramatically transform the card industry, reducing profitability for issuers and limiting consumer credit access. Nonetheless, JPMorgan increased its price target for Capital One to $256 from $237 in its fourth-quarter consumer finance preview.
Jeff Marks, director of portfolio analysis for the Club, indicated a cautious approach, stating, "We're just holding here to let the storm clear." Meanwhile, on "Squawk on the Street," Jim Cramer questioned the practicality of the cap, suggesting it would discourage companies from issuing credit cards due to profitability concerns. He wagered that the economy would suffer, with decreased incentives for lending leading to tighter access to credit, thus affecting consumer spending.
Jim Cramer commented, "I'm not sure what the president's game plan is here. If he wants to take the market down, just say it." This sentiment was echoed as Wells Fargo, another credit card issuer, saw its stocks dip nearly 1% following the news. CEO Charlie Scharf has previously highlighted credit cards as a growth area, though this could be subject to change.
In contrast, Goldman Sachs managed to rebound after an initial dip prompted by the proposal. The firm recently arranged to transfer the Apple Card to JPMorgan Chase, insulating it from potential fallout. Despite the overall downturn, both Goldman and Wells Fargo have reported strong performances, with Goldman gaining over 53% last year and Wells Fargo up by 32%.
Capital One's shares, boosted earlier this year by a successful $35 billion acquisition of Discover Financial in May, are under scrutiny as the company prepares to release its earnings results on January 22. Meanwhile, Wells Fargo and Goldman Sachs are set to report their results later this week. Observers will keenly follow the commentary from management during the earnings season to gauge the proposals' potential impacts.
Jim Cramer's Charitable Trust holds shares in Capital One, Wells Fargo, Goldman Sachs, and Apple. Subscribers to the CNBC Investing Club with Jim Cramer receive trade alerts ahead of portfolio changes. Jim's trades are executed 45 minutes after his trade alerts are circulated to club members.