Shares of most tech stocks sputtered this morning as investors weighed new economic data and tried to figure out whether the recent market rally is for real or too optimistic. The Nasdaq Composite had given up about 1.3% as of this writing.
Shares of the buy now pay later (BNPL) company Affirm (AFRM -4.58%) traded more than 6% lower as of 10:46 a.m. ET today. Shares of the digital bank SoFi (SOFI -3.17%) also traded more than 6% lower, while shares of the artificial intelligence lender Upstart (UPST -2.67%) were down 6.6%.
New data from the U.S. Census Bureau this morning showed that retail sales in July came in flat from June. But retail and food sales, not including gas and auto, rose by 0.7%, as people were able to take some of the money they were spending on gas and allocate it to other areas. Online sales rose 2.7% in July.
Investors are also trying to determine what kind of recession may be coming in the U.S. later this year or in 2023. Alessio de Longis, a senior portfolio manager at Invesco Investment Solutions, still doesn't think the market is priced for a recession.
"Broadly speaking, equity and credit markets have not discounted the additional underperformance due to lower earnings growth to be expected in a recessionary scenario," he told MarketWatch this morning.
Furthermore, investors are gearing up for the Federal Reserve's July meeting minutes, which will come out this afternoon. Following the Fed's July meeting, investors seemed to cheer comments from Chairman Jerome Powell that the Fed may be easing up on its intense rate hiking this year. But now the market seems worried that it may have moved too soon, interpreted Powell's words incorrectly, and that the Fed may stay hawkish.
Data from July suggested that inflation might have peaked in July, but it may not be enough yet to confirm that the economy is out of the woods. The slowing of inflation was led by a big decrease in energy prices, and some analysts and experts think those could rise again before the year is over.
A hawkish Fed has not been good for fintech stocks like Affirm, SoFi, and Upstart, which have all taken a huge hit this year due to rising interest rates. Rising rates have dried up the capital markets, which these companies rely upon to fund and purchase loans they originate. Rising rates and the possibility of a more severe recession could also increase loan losses in a meaningful way.
The Fed's meeting minutes at 2 p.m. have the potential to move markets, depending on whether the market views the Fed as remaining hawkish or becoming more dovish.
I continue to have concerns about how fintech companies like Upstart and Affirm's businesses will perform in the near term because there are still likely to be rate hikes this year, which could exacerbate funding issues for the next several quarters. Investors are also going to be wary of purchasing loans and will be requesting higher returns on those loans if they smell a bad recession coming, which could cut into loan volume, a big part of how these companies make money.
I think SoFi is the best positioned to weather the storm right now, given its high-quality customer base. I'm not interested in Affirm or Upstart right now.