What happened
The stock market was under serious pressure on Tuesday morning, with all three major averages in the red at 11:30 a.m. ET. And insurance technology company Lemonade (LMND 2.12%) was underperforming, with shares down by more than 4%, despite trading higher earlier in the day.
So what
There isn't any company-specific news driving today's move. Rather, it appears to be fueled by general market weakness and interest rate fears.
Image source: Getty Images.
Specifically, the major catalyst that caused the market to move sharply lower midmorning was commentary by Federal Reserve Chairman Jerome Powell, who indicated that the Fed will consider speeding up its bond-purchase tapering when the policy committee meets in December. This could indicate that inflation is a bit more persistent than the Fed initially thought and could also indicate that the Fed could begin raising interest rates to combat inflation sooner than experts had expected.
Now what
Rising interest rates and high inflation are typically not great for the stock market in general, but that's especially true for high-growth stocks like Lemonade. Without getting too deep into the weeds on an economic discussion, the general idea is that stock valuations are inversely correlated with risk-free rates of return (the 10-year Treasury yield is a good benchmark). The thing to know is that as these bond yields move higher, investors will put more money into lower-risk assets to take advantage of rising yields and will take money out of higher-volatility assets like growth stocks.
The key takeaway is that rising interest rates have relatively little impact on Lemonade's underlying insurance business. It sells a product that consumers need, and for generally less than the competition. And Lemonade doesn't rely on borrowed money to fund its business (it has no debt), so rising rates won't raise its cost structure.
When the stock reacts negatively to news like this, it could be a compelling opportunity to buy shares at a discount.
