Investors have been nervous all year about the impact that the Federal Reserve has had on the overall economy. Many market participants perceived the Fed as having been late in responding to inflationary pressures. They've also been concerned about the rapid pace of interest-rate increases that the monetary-policy body implemented to fight inflation.
Therefore, when the Fed said on Wednesday that it would leave interest rates unchanged in December and expected to start cutting rates in the coming year, investors couldn't have been more pleased. The move launched a rally that sent the Dow Jones Industrial Average (^DJI 0.40%) to a record high and saw other stock market indexes climb to their best levels in nearly two years.
Yet even as the broader market rallied, some stocks definitely benefited the most from the Fed's apparent pivot. Below, you'll learn more about why Upstart Holdings (UPST 2.76%) and Affirm Holdings (AFRM 5.31%) were big winners in the aftermath of the Fed announcement -- and why they could keep moving higher in 2024.
Upstart hopes for a reversal of credit trends
Shares of Upstart Holdings were up more than 20% on Wednesday following the Fed decision. They continued to gain ground on Thursday, rising another 6% and aiming to reverse what's been a precipitous drop in recent years.
The fast pace of interest-rate increases wrought havoc in some areas of the economy. Financial stocks, in particular, suffered, as many deposit customers sought to withdraw their assets to pursue higher-rate opportunities elsewhere.
Meanwhile, the steep rise in loan rates made many bank customers reluctant to take out new loans. That hurt Upstart, which has built partnerships with numerous financial institutions in originating personal and auto loans with its artificial intelligence (AI)-driven credit-rating model.
The Fed decision could help Upstart in multiple ways. If rates start to fall, then Upstart's banking partners could be in a stronger financial position from which to pursue growth opportunities in lending. That could get loan origination volume moving back upward to more normal levels.
At the same time, falling rates could also help borrowers by making them less likely to default on their loans. Notably, much of the concern about Upstart has surrounded loans it has kept on its books, so a lower default rate could produce an immediate positive impact on Upstart's business.
The company's stock is still down sharply from its highs above $300 per share in 2021. With the stock still trading below where it did shortly after its late 2020 initial public offering, Upstart looks like an attractive buy to many growth-minded investors.
Affirm looks to strong consumers
Elsewhere, shares of Affirm Holdings were up 12% on Wednesday and kept rising on Thursday, with a more modest 1% gain. The buy now, pay later (BNPL) specialist not only stands to benefit from lower rates, but also has enjoyed unexpected strength from shoppers during the holiday season.
Affirm's business model makes access to capital essential. By advancing money to merchants in exchange for taking on installment payment credit risk with shoppers, Affirm counts on being able to obtain financing cheaply. It also counts on its customers being able to repay their obligations. Rising interest rates through 2023 made capital more expensive and put pressure on purchasers.
If interest rates fall in 2024, it would potentially leave consumers in stronger financial shape and make it easier for Affirm to get the capital it needs to operate effectively. Moreover, with a greater than 70% surge in the number of shopping orders using BNPL services during the Thanksgiving holiday week, Affirm stands to benefit as a partner to major e-commerce marketplaces.
Affirm's stock remains almost 75% below its late 2021 highs. That gives it ample room to run higher, particularly if shoppers remain strong and the macroeconomic environment gets more favorable.
