What happened
Shares of several tech-related stocks fell today after a hotter-than-expected inflation report sent the market downward.
Shares of the large chipmaker Taiwan Semiconductor (TSM 2.84%) fell roughly 2.5% today. Meanwhile, shares of the large crypto exchange Coinbase (COIN 4.68%) fell roughly 6.8%, and shares of the artificial intelligence-assisted lender Upstart (UPST 3.90%) fell almost 3%.
So what
Earlier this morning, the U.S. Commerce Department reported that the Personal Consumption Expenditures Price Index (PCE), excluding food and energy, rose 0.6% in January on a monthly basis. The PCE was up 4.7% year over year. The PCE is the Fed's preferred gauge of inflation, and the January numbers came in above estimates.
Image source: Getty Images.
"This morning's strong inflation data continued the recent spate of market-unfriendly news. This could keep the policy rate higher for longer than the market had hoped, which in turn will likely pressure earnings," said Matt Peron of Janus Henderson Investors, according to CNBC. "While we do see signs that inflation will eventually moderate, higher rates for longer will take a toll."
Softer inflation data in recent months got the market rolling to start 2023, but more recent data has indicated that the road may not be as smooth as some expected. Many market participants heading into the year expected the Fed to raise interest rates a few more times in the first half of the year, and then potentially cut rates toward the end of the year. But recent inflation data has made this trajectory more clouded.
While Taiwan Semiconductor, Coinbase, and Upstart all have different businesses, higher rates are bad news for all three of them. Taiwan Semiconductor is the largest chipmaker in the world, and while the company is well positioned, a higher-rate environment makes their already capital-intensive business more expensive. In addition, higher rates for longer periods of time make it more likely that the U.S. economy tips into a recession. That would slow demand for the business.
Coinbase is a large cryptocurrency exchange that really benefits when investors, especially on the retail side, are actively trading cryptocurrencies. But rising rates have crushed crypto prices and pushed the industry into a crypto winter.
And Upstart is a loan origination platform that is in the business of originating personal loans and largely selling them to investors. But rising interest rates have raised funding costs for these investors and made them concerned about credit quality on Upstart loans, which has led investors who purchase Upstart loans to move to the sidelines. This has forced Upstart to slow loan originations.
Now what
Any sign of an environment that includes higher interest rates than expected heading into this year or higher rates for longer typically leads to a sell-off of many tech and growth stocks. The business models of Taiwan Semiconductor, Coinbase, and Upstart all come under pressure from higher rates.
Ultimately, I think Taiwan Semiconductor is poised to be a long-term winner, given its position in an industry that should see long-term growth.
I am not especially bullish on Coinbase but do think it will succeed if the crypto industry rebounds, because the company has a strong-enough balance sheet to navigate a crypto winter. Finally, I would not recommend buying Upstart at this time until there is further stabilization in the economy.
