What happened
Shares of several popular fintech stocks rode the wave upward with the broader market Thursday after new data from the Labor Department indicated that the red-hot U.S. job market may be cooling a bit.
As of 12:30 p.m. ET, shares of one-stop-shop financial services company SoFi (SOFI 4.55%) were trading nearly 4% higher, artificial intelligence-assisted lender Upstart (UPST 3.90%) was up by more than 4%, and insurtech company Lemonade (LMND 8.23%) was up by more than 5.5%.
So what
Investors rejoiced after new unemployment claims came in at 225,000 for the week that ended Dec. 24 -- 9,000 higher than the prior week and slightly above the consensus estimate. While it might sound odd for investors to be happy about rising unemployment, the Federal Reserve has made it abundantly clear that its war on inflation will continue until it slows the U.S. economy, and some deterioration in the labor market would signal that slowdown is happening.
Image source: Getty Images.
Low unemployment and rising wages this year have contributed to some of the highest levels of inflation seen in more than 40 years, and also enabled consumers to keep spending through price hikes, which many economists feared could lead to runaway inflation.
"We were overdue for a rebound, and a lot of the recent weakness may be explained by further tax loss selling once the Santa Rally didn't materialize," Louis Navellier, chief investment officer of Navellier & Associates, told CNBC Thursday. "We'll have further volatility into the new year with plenty of uncertainty about whether a soft landing is possible and if not how much resolve the Fed will have to not pivot if we tip into a serious recession."
A soft landing would be if the Fed's interest rate hikes can bring down inflation with only a modest rise in unemployment and without tipping the economy into a severe recession.
Rising interest rates have hit SoFi, Upstart, and Lemonade hard, and all three fintech stocks got crushed this year. The business models of SoFi and Upstart depend significantly on their ability to originate loans and then sell them to institutional investors, whether whole-loan buyers or by securitizing the loans and then selling them. But investors have been much more cautious about purchasing these loans as their costs of capital have risen due to higher interest rates and the worrisome economic outlook.
Lemonade, which had an incredibly high valuation last year, has been recording higher losses in its insurance business. Its net loss ratio rose to 105% in the third quarter, which means insurance claims and adjusted expenses outpaced its earned premiums.
Now what
The Fed is expected to keep raising rates into 2023, although if its projections are correct, it should be almost done with its rate-hiking campaign.
The end of that series of rate hikes should help all three of these fintechs and allow them to find their footing under more stable market conditions, but the economy could still fall into a recession. Investors will be eager to see how credit quality holds up at SoFi and Upstart. SoFi lends to higher-quality borrowers, so its loans should hold up better, but it's still a bit unclear how consumers in general will hold up, especially if there is a severe recession.
Ultimately, I do like what SoFi is building, but I would need to see better execution and financial results before I'd consider buying shares. I also like Lemonade's long-term vision, but it would help if it could get its net loss ratio under control.
