What happened
Shares of Block Inc. (SQ 5.58%) were surging higher on Wednesday afternoon, climbing as much as 8.9% at around 2:30 p.m. EST. By 3 p.m. EST, Block was trading 7.4% higher at $66.70.
The major market indexes were up too, led by the Nasdaq Composite, which was up 328 points (3%) at 3 p.m. EST. The Dow Jones Industrial Average had gained 403 points (1.2%), while the S&P 500 was up 76 points (1.9%) at 3 p.m. EST.
So what
There was no secret as to why the markets took off Wednesday afternoon. Block, along with other fintechs and growth stocks, jumped higher after Federal Reserve Board Chair Jerome Powell delivered a speech at the Brookings Institution.
In the much-anticipated speech, Powell gave the clearest indication yet that the Fed would moderate the pace of rate hikes, potentially as soon as the December meeting. In his speech, Powell said:
NYSE: SQ
Key Data Points
Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.
The Fed has increased rates by 75 basis points at each of its last four meetings, so if they were to moderate the increases in December, it could conceivably be a 50 basis-point hike. The federal funds rate is currently in the 3.75% to 4% range.
Now what
Growth stocks reacted the most to this news, as high interest rates make it harder for growth companies like Block to invest and expand. Now, rates are still high, and they haven't peaked, but the fact that the pace could slow provides some hope that the end could be near -- and thus the rally.
But keep in mind, the trajectory of rates will depend on inflation, as the goal is to bring it down to the 2% range. If it keeps trending lower, the pace of rate hikes will moderate, but if it doesn't trend lower, that could alter the Fed's stance.
Block investors certainly appreciate the boost today, but there is a long way to go for a stock that is down 58% year to date and still has a price-to-earnings (P/E) ratio of near 40. However, the price-to-sales (P/S) ratio of 2 is more attractive. If you own it, hold it, because it has long-term potential. But if you don't, watch where inflation and the Fed go, as the valuation is still high, and there is much uncertainty ahead.
