What happened
Shares of Meta Platforms (META -4.13%), Etsy (ETSY -0.86%), and Airbnb (ABNB -3.18%) were catching an afternoon breeze after Federal Reserve Chair Jerome Powell made dovish remarks in a speech today.
That sent stocks higher broadly, especially the beaten-down tech sector, which has proven to be particularly sensitive to interest rates.
As of 2:45 p.m. ET, the Nasdaq was up 2.9%, while Meta had gained 6.4%, Etsy was up 4.7%, and Airbnb was up 4.3%.
So what
Speaking at the Brookings Institution, Powell said that the central bank could slow the pace of rate increases at the next FOMC meeting on Dec. 13-14. However, the Fed chair stood by his earlier comments that the Fed would continue to raise rates until inflation was brought under control. He also was not convinced that the recent moderation in inflation was sustainable, saying again that rates would have to remain elevated for some time in order to bring inflation back down to the Fed's target of 2%.
Still, Powell's remarks offered enough daylight to investors to convince them that rates would start to slow at the December meeting, as many economists were already expecting. The Fed had raised rates by 75 basis points at each of its last four meetings, bringing the federal funds rate to 3.75% to 4%, but the market is anticipating a 50-basis point hike at the December meeting.
The increased likelihood of slowing rate hikes sent tech stocks soaring, especially those that have fallen sharply this year amid rising interest rates, inflation, and fears of a recession.
Meta Platforms stock has imploded for a variety of reasons, including its underwhelming metaverse pivot and challenges from TikTok and Apple in its ad business. However, the company has cited macroeconomic headwinds several times as one of the reasons that its growth has slowed, even turning negative in its most recent quarter.
The digital ad market is highly cyclical, as advertisers have already pulled back on ad spend in anticipation of recession. If the Fed believes it's time to start slowing rate hikes, that could signal that a recovery is closer than expected.
Etsy also experienced a boom during the pandemic and has consequently struggled this year as difficult comparisons and a shift in consumer spending have caused growth in its gross merchandise sales, or total spending on its marketplace, to turn negative. The company noted macro headwinds and a stronger dollar as some of the factors weighing on its performance, and Etsy is also more vulnerable to a recession than other e-commerce companies because it sells discretionary items like jewelry, gifts, apparel, and stationery, among others. Since slowing rate hikes makes a "soft landing" more likely, that's good news for Etsy, as it would be in a good position if the economy can avoid a recession.
Finally, Airbnb has performed well this year, since it's benefited from the economic reopening, but the stock has still fallen as investors seem to be fearful that a recession is around the corner, which would hurt the travel sector and Airbnb. A slowdown in rate increases, therefore, makes it less likely that the economy will suddenly sink into a recession, and also encourages investors to invest in growth stocks, which benefit from interest rates going down, or in this case, by not going up as fast.
Now what
It can be risky to read too much into Powell's comments, but investors should take heart in the fact that the market has responded so favorably to any sign that interest rates and inflation are slowing. On Nov. 10, the Nasdaq jumped 7.4% after October's inflation reading was lower than expected, and a cool November reading would likely further convince the Fed to slow down rate hikes.
Inflation will eventually cool off, and interest rates will stabilize. While we don't know when that will happen, based on today's reaction, Meta Platforms, Etsy, and Airbnb all seem poised to gain once the economy rebalances.
