What happened
Shares of several tech and fintech stocks dropped to start the new year as investors continued to speculate about the orbit of inflation and interest rates.
Shares of the Brazilian e-commerce and payments company StoneCo (STNE 0.07%) traded roughly 8.7% lower as of 2 p.m. ET today.
Meanwhile, shares of the artificial intelligence-assisted loan platform Upstart (UPST -0.58%) traded about 3.5% down, while shares of the insurtech company Lemonade (LMND -0.06%) were roughly flat after having been down as much as 4% earlier today.
So what
Investors today are picking up where they left off in 2022 by going back and forth about the macro outlook. Inflation now looks to be cooling after the Federal Reserve's rapid and intense interest rate hikes in 2022, but many fear the rate hikes may tip the economy into a recession, which may not bode well for these stocks.
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"A recessionary environment in 2023 could further hamper tech stock performance in the new year, as investors' thirst would increase for value oriented companies and those with higher profit margins, more consistent cash flows, and robust dividend yields," AXS Investments CEO Greg Bassuk wrote in a note, according to CNBC.
Now, some believe a recession might actually be bullish for stocks because it could prompt the Federal Reserve to cut interest rates, creating more of a risk-on environment for tech stocks. However, this may also lead to more inflation, which isn't always so great for stocks, according to the famous investor Michael Burry, the founder of Scion Asset Management.
Burry believes a recession this year could lead to the Fed cutting interest rates and stimulating the economy, which will then spur another jump in inflation. This then might lead to another rate-hiking expectation by the Fed.
But tech stocks like StoneCo, Lemonade, and Upstart may not fare so well in either of these scenarios. Upstart needs a somewhat healthy consumer to have the necessary demand for loans, as well as keep loan losses in check so institutional investors feel comfortable purchasing loans originated by the company.
Rising interest rates have also led to a higher cost of capital for institutional investors, which leads them to require higher returns on loans. Upstart should be able to reprice its loans but it takes time and it can be difficult to keep up with such rapidly rising funding costs.
StoneCo would also struggle in a recession because business and consumer spending activity will slow, which is key to its business. StoneCo seems to be struggling today, in particular, as Brazilian stocks sell off. Brazil's new president, Luiz Inacio Lula da Silva, officially took office yesterday and investors are concerned about some of his more left-leaning economic plans that may impact the Brazilian economy.
Now what
I do not see anything super specific impacting these three stocks today; it's largely due to broader macroeconomic and geopolitical concerns that have plagued markets for most of 2022. The only thing that will quell these concerns is time and better visibility into the future.
Of these three names, I do see good long-term potential in StoneCo and Lemonade. StoneCo has an enormous market opportunity in Latin America and Lemonade is an interesting disruptor in the insurance space.
I am less optimistic about Upstart but the stock should be able to perform better if market conditions stabilize, or if it can demonstrate sound credit quality during whatever is expected to come this year.
