What happened
The market zoomed higher this morning after a better-than-expected inflation report showed that consumer prices finally might be easing. Bond yields dipped and the Dow Jones Industrial Average had jumped more than 880 points as of this writing, while the Nasdaq Composite was up nearly 5.6%.
Shares of Upstart Holdings (UPST +8.21%), the lender powered by artificial intelligence (AI), traded more than 17% higher as of 10:50 a.m. ET today.
The stock of the one-stop-shop financial services company SoFi Technologies (SOFI +3.95%) was more than 8% higher, and the digital consumer bank Ally Financial (ALLY +1.46%) was up more than 15%.
So what
The U.S. Bureau of Labor Statistics this morning released the latest data for the Consumer Price Index (CPI), which show that inflation slowed more than economists were expecting in October.
Image source: Getty Images.
The CPI ticked up by 0.4% from September and was up 7.7% year over year. Economists had been projecting a 0.6% monthly increase, and for the CPI to be up 7.9% year over year.
The CPI showed that prices for food, used vehicles, medical care, and transportation all slowed in October, although fuel prices and shelter prices climbed. But the market seemed particularly happy with the decline in used-car prices, which have been elevated for some time; the drop is a good indicator that consumer spending is slowing down a little bit.
Upstart, SoFi, and Ally all stand to benefit from easing inflation because it means the Federal Reserve might be able to slow the pace of its interest rate hikes, which have dogged the market all year long.
Upstart's stock has been hammered this year as the investors that fund and purchase its loans have moved to the sidelines due to a higher cost of capital and concerns over credit quality.
The stock is surging today, despite Bank of America analyst Nat Schindler downgrading the company from a neutral rating to underperform following very poor earnings results in the third quarter. "While it is unclear if this is the bottom for UPST (in the context of headwinds and rising rates), we believe any recovery in the online lending industry won't come until late 2023," Schindler wrote in a research note.
NASDAQ: UPST
Key Data Points
SoFi is also a digital lender that sells loans to institutional investors, so slower inflation and lower rate hikes by the Fed will make it easier for the company to sell loans. It will also slow the rapid rise the company has seen in its cost of funding. SoFi has access to deposits, but with so many rate hikes this year, even those have come under pressure.
Ally is a big auto loan source and has been waiting for used-car prices to moderate. At one point earlier this year, they were up 60% compared to 2019. While declining used-car prices could lead to further loan losses for Ally, management has been preparing for this, and it does provide more clarity on the economy.
Now what
Ultimately, slowing inflation and a Fed pivot are going to help all of these fintech stocks. But of these three names, I like Ally the most here because it trades at a very depressed valuation and I think management has a good handle on credit.
I also think SoFi has a good long-term outlook. While I don't consider the stock cheap and I think management has some kinks to work out, I still believe a lot of what management is doing looks promising.
Upstart will benefit from slower rate hikes, but I am not interested in this stock due to its inability to operate amid rapidly rising interest rates. I still think it's too early to invest in the company.
