What happened
Shares of several large payments stocks took a hit Thursday as the broader stock market sold off following the Federal Reserve's interest rate hike and as investors grew more concerned about the macroeconomic outlook.
Shares of Mastercard (MA +2.11%) traded almost 5% lower as of 1:10 p.m. ET, shares of Paypal (PYPL +1.24%) had fallen by around 5.5%, and shares of Brazilian fintech StoneCo (STNE +1.34%) were down more than 8%.
So what
On Wednesday, the Fed hiked its benchmark overnight lending rate, the federal funds rate, by 75 basis points -- the largest such move the agency has made at a single meeting since 1994. The federal funds rate now sits within a range of 1.5% and 1.75%.
Image source: Getty Images.
That decision came on the heels of the government's latest report on the Consumer Price Index (CPI), which measures inflation based on the prices of a basket of commonly purchased goods and services. In May, the CPI rose 8.6% year over year. Not only was that higher than economists had expected, but it was also an indication that inflation may not have peaked yet. In response, the Fed opted for a 75 basis point hike, as opposed to the 50 basis point hike the market had been expecting just days earlier. Fed Chairman Jerome Powell also said the Fed would likely increase interest rates by another 50 or 75 basis points at its next meeting in July.
The businesses of Mastercard, Paypal, and StoneCo are fairly dependent on consumer spending and business activity. Investors are now worried that as long as high inflation persists, the Fed will have to remain aggressive with monetary policy, which increases the likelihood of a recession or stagflation. Either one would hinder consumer and business spending.
NYSE: MA
Key Data Points
"Like Atlas with the world on his shoulders, the consumer has been supporting the US -- and, to a large extent, the world -- economy all year," a team of Barclays strategists recently wrote in a research note. "But that might be about to change."
Recently, big-box retailers like Target have noted that their inventories are quite high at the moment as consumers are shifting their spending away from discretionary purchases and more toward necessities. People's savings have also started to dry up because of how expensive everything has gotten.
And companies have begun to announce some serious job cuts. In the tech sector alone, there were 16,000 job cuts in May and 7,000 more in the first half of June, according to a recent Fast Company article referencing Layoffs.fyi data. Recently, large cryptocurrency exchange Coinbase announced that it will lay off 18% of its workforce as it prepares for the "crypto winter."
Now what
Obviously, the economic environment is getting much tougher, and that could be problematic for these three companies.
However, I definitely feel good about Mastercard over the long term. It has built one of the largest payments rails in the world, and it can do OK even during periods of high inflation because as purchases get more expensive, its transaction fees on those purchases rise in tandem. A slowdown in consumer spending would be detrimental to its business, but the company is large enough to withstand a recession and has a bright future ahead with the shift to digital payments. I take a similar view when it comes to Paypal.
StoneCo is in a much riskier position than these two because it is much earlier in its journey, and operates in Latin American economies that could be tougher and more volatile markets in the coming years. Still, at today's prices, I'm more bullish on StoneCo than not.
