What happened
Several fintech stocks reversed course and moved higher this afternoon after Federal Reserve Chair Jerome Powell, during a highly anticipated press conference, said that the Fed is preparing to slow the pace of its interest rate hikes.
Shares of the artificial intelligence-assisted lending platform Upstart Holdings (UPST 3.90%) traded nearly 3% higher in the final hour of trading today. Meanwhile, shares of the digital bank SoFi Technologies (SOFI 4.55%) traded nearly 4% higher, and shares of the buy now, pay later company Affirm Holdings (AFRM 2.49%) were up close to 6%.
So what
After four consecutive interest rate hikes of 0.75 percentage points earlier this year, most market participants were expecting the Fed to raise interest rates by a half point at its final meeting of the year in December. Still, it was far from unanimous.
Image source: Getty Images.
According to the CME Group's FedWatch Tool, which pulls together futures pricing on the Fed's benchmark overnight lending rate, the federal funds rate, only about 66% of the market expected the Fed to do a half-point hike at its December meeting, as of yesterday. But as of this writing, the probability had jumped to 77%.
During his press conference, Powell said that the labor market "shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation." Powell also added that "despite some promising developments, we have a long way to go in restoring price stability."
This morning, data from the payroll processing company ADP showed that private businesses in the U.S. only added 127,000 jobs in November, which came up far short of the 190,000 estimate.
"Turning points can be hard to capture in the labor market, but our data suggest that Federal Reserve tightening is having an impact on job creation and pay gains," said Nela Richardson, ADP's chief economist, according to CNBC. "In addition, companies are no longer in hyper-replacement mode. Fewer people are quitting and the post-pandemic recovery is stabilizing."
Powell has said previously that the Fed would like to see some deterioration in the strong labor market to see that the Fed is making progress in its war against inflation. Investors will certainly be paying close attention to Friday's jobs report from the U.S. Bureau of Labor Statistics.
For tech and fintech companies like Upstart, SoFi, and Affirm, rising interest rates have been a massive drain on their stocks. Higher rates have dried up demand among investors who purchase loans these companies originate and have increased the cost of capital for everyone. There is also a higher likelihood that loan defaults keep rising because interest payments are higher and the U.S. economy could be headed for a recession in 2023 or 2024.
Now what
Clearly, investors are taking Powell's press conference in stride. While Powell said there is still a lot of work to do, he made it even more clear to the market that a half-point hike is likely coming at the Fed's December meeting.
Powell also noted that he does "continue to believe that there's a path to a soft or softish landing" in which the Fed can beat back inflation without leading to a recession. This is a slightly more positive tone than we've heard from him recently.
However, with rates still on the rise and a recession still a very real possibility, I am not terribly interested in Upstart or Affirm, even though they are likely to benefit and rise from less-aggressive rate hikes. SoFi would be my favorite of this group, but even it has run into some issues as of late that lead me to believe the stock is a hold right now, as opposed to a strong buy.
