What happened
On a positive day for markets, Upstart Holdings (UPST 1.75%), Block (SQ +0.07%), and StoneCo (STNE +2.72%) were all up much more than the broader indexes, rising 13.7%, 9.6%, and 9.4%, respectively, as of 2:53 p.m. ET.
At first you may not think these stocks have much in common, with Upstart using AI to underwrite loans to non-prime customers, Block being a small business payment processor and millennial- and Gen Z-focused financial app, and StoneCo being an enterprise payments processor in Brazil. But each of these stocks have characteristics in common that propelled them higher on a risk-on day for the markets.
Image source: Getty Images.
So what
Each of the aforementioned stocks is a new-age fintech stock. In general, fintech stocks are seen as exciting growth companies that are using new digital technologies to augment financial inclusion among populations without as much access to the banking system.
However, that disruption and inclusion means investors may also view their businesses as riskier, since the perception is that they are going after populations seen as too young and risky for large, old-school conservative banks. So when there are fears of an economic downturn, especially due to omicron fears that could hurt service workers and small businesses, these stocks will suffer.
Upstart in particular targets "riskier" populations, using its artificial intelligence engine to underwrite loans for them. Block began as a payment processor for small businesses, and has also developed its Cash App into a neobank for millennials and Gen Z, complete with risk-on features such as crypto trading. And extremely high inflation and rising interest rates have caused a massive sell-off in Brazilian stocks generally and Brazilian financial stocks especially. Although StoneCo generally works with larger enterprises, it has been working more and more with small businesses to juice growth, which may be more at risk from a financial slowdown in the country.
Inflation, the fear over rising interest rates, and the extremely rapid surge of the omicron variant have all conspired to push these stocks down hard in the past few months in a general "risk-off" period. Upstart is down 63% from 52-week highs, Block is down 41%, and StoneCo is down a stunning 83% -- and this is after today's strong performance.
So, each stock had likely already reflected a lot of market fears. But today, news came out that the Food and Drug Administration (FDA) was set to approve at-home COVID-19 pills this week from Pfizer and Merck. That could go a long way toward easing burdens on hospitals. Moreover, the Biden administration announced it would make 500 million at-home COVID-19 tests available for free.
The dual announcements likely made investors more optimistic consumers would be able to lead more normal lives during this omicron surge, with stronger economic growth than feared yesterday and last week.
Now what
Omicron, inflation, and the Federal Reserve all remain question marks heading into next year. However, today was a welcome reprieve for these highly affected stocks. For those who fear the new measures won't be able to stop an economic slowdown next year, these stocks still may not be the best option, even after their declines.
However, if you think the economy will remain strong, the omicron surge won't be as bad as feared, and the Federal Reserve will also be able to contain inflation without harming the economy in the process, each of these high-growth names looks compelling at these levels, even after today's bounce. Just be aware that each should remain volatile going forward, both to the upside and downside.
