What happened
Shares of several tech stocks bounced today after an intense few weeks of selling and as the market tries to determine what will happen to the economy and monetary policy in 2023.
Shares of the artificial-intelligence lending-company Upstart (UPST 0.60%) traded 4.7% higher as of 12:05 p.m. ET today. Shares of the buy now, pay later (BNPL) company Affirm (NASDAQ: AFRM) traded 4.1% higher, while shares of digital-bank SoFi (SOFI 0.31%) traded as much as 4.9% higher before giving up most of those gains, as of this writing.
So what
Following hot inflation data for August and the Fed's September meeting last week, which ended with another big 0.75% interest-rate hike and some grim comments from Fed Chairman Jerome Powell, there has been a lot of pressure on stocks. Tech stocks have been some of the biggest losers this year because many of them traded at astronomical valuations last year and rate hikes reduce the future value of their cash flows.
Image source: Getty Images.
But today, the market is doing better, likely due to one of several reasons: investors are simply taking a breather from the selling, the market thinks the Fed might pivot in 2023, or due to the surging U.S. dollar.
Since the Fed's meeting, investors have done nothing but sell. However, another dynamic at play today seems to be related to the strong dollar, which some think could lead the Fed to pivot from its hawkish stance in 2023. The dollar index, which tracks how the dollar is performing compared to other currencies, is up more than 18% this year as the dollar has overtaken the British pound sterling and recently overtook the euro for a short time.
Cathie Wood, founder and CEO of ARK Invest, said in a tweet that "the dollar's parabolic move has been devastating to the rest of the world and should come back to bite U.S. competitiveness, jobs, and economic activity, forcing the Fed to pivot."
NASDAQ: AFRM
Key Data Points
JPMorgan Chase's top strategist and perennial bull Marko Kolanovic also thinks the Fed could pivot and cut rates in 2023, "thus backstopping equity markets," especially if a deep recession occurs next year and there's significant deterioration in the labor market.
Currently, the federal funds rate sits in a range of 3% to 3.25%. The Fed's median forecast is that the federal funds rate will end the year at 4.4% and then peak at 4.6% in 2023. If there is a pivot and the Fed cuts rates or doesn't raise them as high as projected, that could be good for tech stocks.
Now what
I would caution investors from expecting too much from today's move. After all, the Fed still expects a 0.75% rate hike and another half-point bump before the year ends. I don't expect too much to happen until we get inflation data from September.
How the economy will shape up in 2023 is still a mystery. For this reason, I plan to continue to stay away from Affirm and Upstart, which have seen their business models heavily disrupted by rate hikes. This has led to funding issues and started to make investors weary of future loan losses.
I do, however, think SoFi is much better positioned to ride out the storm because it caters to a much higher-quality customer base that should be more resilient in a more severe recession.
