What happened
Shares of several popular fintech stocks fell today as investors digested inflation data from Friday and prepared for the Federal Reserve's upcoming meeting tomorrow. The Nasdaq Composite had fallen almost 4% as of this writing.
Shares of buy now, pay later company Affirm (AFRM -0.16%) had fallen close to 10% as of 10:25 a.m. ET today. Shares of artificial intelligence lender Upstart (UPST -0.44%) had fallen nearly 11%, and shares of digital bank SoFi (SOFI -0.56%) were also down close to 10%.
So what
The market is still reeling from the latest inflation reading of the Consumer Price Index (CPI) on Friday, which showed that the index had risen 8.6% in May on a year-over-year basis. The CPI measures the prices of daily goods and services and is one way investors measure inflation. Economists had only expected the CPI to rise 8.3% in May. The new data is a sign to many that inflation has not peaked as many had initially thought.
This means the Federal Reserve could have to get potentially even more aggressive to rein in inflation. Heading into this week, many assumed that the Fed was poised to do a half-point rate hike, but now some speculate that there could be an even bigger move coming.
This morning, the yield on the 2-year U.S. Treasury bill briefly inverted with the yield on the 10-year U.S. Treasury bill, which many consider an indicator of a looming recession.
10-Year Treasury Rate data by YCharts.
Renowned economist Mohamed El-Erian, who formerly ran the large U.S. bond fund Pimco, criticized the Fed on CBS' Face the Nation yesterday for not containing the issue sooner. He also said the U.S. is currently experiencing stagflation, which is categorized by soft growth, high inflation, and, eventually, higher unemployment.
"The darkest period is that inflation persists, heads to 9%, people start worrying that it's gonna go to 10%, and next thing, you know, we end up in a recession. And that would be tragic if that were to happen," El-Erian told CBS.
Tech and fintech stocks have not fared well as the Fed has gotten more aggressive with monetary policy. Affirm, Upstart, and SoFi were at the center of the tech boom toward the end of 2021, and each ballooned to a massive valuation. But they have come crashing down and continue to experience pain as the Fed has failed to put a lid on inflation.
Now what
Affirm, Upstart, and SoFi could all face more pain in the near term, especially if the Fed chooses to raise its benchmark overnight lending rate by 0.75% at its meeting this week, which would be an unprecedented move for the agency.
Additionally, all three of these companies are in the lending business, albeit in different forms, and therefore face a lack of origination volume if a recession hits or stagflation is truly here, as El-Erian suggests.
Due to the unique nature of their businesses and the potential for credit deterioration, I am not personally interested in Affirm or Upstart right now. But I am keeping an eye on SoFi, because I like the business it is building, and the company serves a much higher-quality borrower.
