What happened
Tech stocks continued to rally today with the Nasdaq Composite up roughly 1.9% as of 2:40 p.m. ET. Investors are off to a good start this week.
Fintech stocks are also enjoying some gains after a tough few months of trading. Shares of the artificial intelligence (AI) powered lender Upstart Holdings (UPST -1.25%) traded nearly 11% higher today, Brazilian fintech Nu Holdings (NU 0.93%) traded nearly 13% higher, and Brazilian payments company StoneCo (STNE -1.64%) traded more than 5% higher.
So what
As has now been discussed many times, the markets turned ugly starting in early November as the Federal Reserve got more serious about combatting the rising inflation being seen in higher daily prices. The Fed began tapering its billions of additional monthly bond purchases that it first started making at the beginning of the pandemic. It indicated it would begin raising its federal funds rate, the agency's benchmark overnight lending rate, likely starting in March and would then likely proceed to do so multiple times in 2022.
The Fed also hinted that it may look to shrink its balance sheet, which now has trillions of dollars on it. That means the Fed would be removing liquidity from the market. All of this spooked investors who in the middle of 2021 might have thought that rate hikes wouldn't begin until the very end of 2022 at the earliest. Since Nov. 1, the Nasdaq is down 7.5% but had been down around 14% at one point in January.
Image source: Getty Images.
During this time period, tech and fintech stocks got hammered. Since Nov. 1, Upstart stock is down close to 38%, StoneCo is down about 10%, and Nu is down about 3%, although Nu only started trading in early December. There doesn't seem to be anything, in particular, driving the move higher for these stocks today -- it mostly seems like investors are buying the dip after some intense selling.
I'm reluctant to believe that the volatility is over, though. Tomorrow, the latest data for the consumer price index, which tracks a range of prices of everyday goods and services used by consumers, will be out for January. The market is expecting to see a 0.5% increase from December and a 7.3% jump year over year. If the CPI comes in higher than expected the market may sell off on worries that inflation is rising too fast and may cause a recession. If it comes in lower than expected, the market may rise on beliefs that inflation fears are overblown.
Now what
The other thing about these three stocks, in particular, is that Upstart, Nu, and StoneCo have yet to report their latest earnings results for the fourth quarter and full year of 2021. So far, the market has not been lenient on earnings. Tech companies that beat analyst earnings and revenue estimates, but implied lower revenue and profits than analysts had been forecasting for 2022, have gotten hammered. There is a high bar for tech companies right now because the market is now taking a much tougher approach to growth multiples. Upstart will report on Feb. 15.
Then, of course, the Fed could say or hint about something at the Fed's next meeting in March that may spook the fragile state of the markets. It's nice to get some relief over the past few days, but I think a lot of volatility lies ahead and that the market is still not in a friendly mood.
I would recommend focusing on valuations and trying to pick growth stocks that you still like, but have not risen too far and too fast in terms of their valuations. For instance, Nu Holdings rising back up to a $46.7 billion market cap definitely seems like too high of a valuation right now.
