What happened
Shares of several tech and fintech stocks traded higher today as stocks in general rose and investors took a breather from the selling that has ensued all year. The Dow Jones Industrial Average rose 754 points, while the Nasdaq Composite gained 3.1%.
Shares of the buy now, pay later company Affirm (AFRM -0.45%) rose more than 9% today, shares of the artificial intelligence lender Upstart (UPST -1.97%) rose roughly 8.4% higher, and shares of the Brazilian digital bank Nu Holdings (NU -1.69%) gained roughly 4.6%.
So what
Despite a red-hot inflation report last week from the consumer price index, which showed consumer prices stayed hot in June, investors seem to finally be starting to let their guard down. Following the inflation report, the market began pricing in a 1% hike to the Federal Reserve's overnight benchmark lending rate, the federal funds rate, at the Fed's meeting later this month.
Image source: Getty Images.
But then two of the Fed's more hawkish members publicly said they support a 0.75% rate hike later this month, and there has been a lot of green in the market ever since. Earnings season also kicked off last week and investors seem fairly pleased with how companies held up in the second quarter ending in June.
"Both investors and the companies were expecting hot inflation, so companies talking about hot inflation having happened in that second quarter was not a surprise at all," said Kim Forrest, founder and chief investment officer at Bokeh Capital Partners, in a CNBC report. "What was a surprise was that they were able to manage through it well."
Investors may also feel that inflation is starting to peak and that the worst of the aggressive rate hikes may soon be in the rearview mirror.
Rising rates have hammered Affirm, Upstart, and Nu, all of which are consumer-facing fintech stocks that traded at massive valuations toward the end of last year. Investors have been concerned that these companies could see higher loan losses or a drop off in consumer demand if the U.S. or global economy enters a recession.
Upstart ran into severe issues when investor demand for its personal loans dropped off. Upstart relies on external investors to purchase its loans and provide continued funding so the company can keep originating loans. But investors became concerned about how these loans would hold up in a down economy and demand has fallen off significantly, forcing Upstart to cut its second-quarter earnings and revenue expectations. Affirm may run into similar issues.
However, all of the major banks that have so far reported second-quarter earnings have said that the consumer remained strong in Q2, spending at healthy levels and facing very few credit issues.
Now what
While market conditions seem to be improving, I am not ready to say that investors are out of the woods just yet. I'd still like to see the Fed move forward with the 0.75% rate hike later this month as opposed to the 1% hike that investors fear.
Additionally, while inflation looks close to moderating, this trend depends on energy prices continuing to decline. Things are trending in the right direction but Chevron's CEO Michael Wirth said last week that the decline in oil prices may not last due to ongoing supply issues.
Ultimately, there still seems to be uncertainty, which isn't good for markets because it makes the future hard to determine. If rates need to keep rising aggressively, then fintech companies like Upstart and Affirm could continue to face the same struggles they have all year. Furthermore, I'd like to see their companies become better insulated against a rising-rate environment.
I am a shareholder of Nu because I believe the company is a banking disruptor in Latin America, which is an under-developed banking market that presents a huge opportunity.
