Shares of several popular fintech stocks fell today as investors digested Friday’s inflation data and prepared for the upcoming Federal Reserve meeting tomorrow. the Nasdaq Composite it had fallen nearly 4% as of this writing.
Company stock buy now pay later Say (AFRM -10.64%) it had fallen close to 10% as of 10:25 am ET today. Artificial Intelligence Stock Lender Upstart (UPST -8.64%) had fallen nearly 11%, and shares of the digital bank sofi (SOFI -6.48%) they also fell close to 10%.
The market is still reeling from Friday’s latest Consumer Price Index (CPI) inflation reading, which showed the index was up 8.6% in May year-over-year. The CPI measures the prices of everyday goods and services and is one way investors measure inflation. Economists only expected the CPI to rise 8.3% in May. The new data is a sign to many that inflation has not peaked as many had initially thought.
This means that the Federal Reserve may have to be even more aggressive in controlling inflation. Heading into this week, many assumed the Fed was ready to make a half-point rate hike, but now some are speculating there could be an even bigger move to come.
This morning, the 2-year US Treasury bill yield briefly reversed with the 10-year US Treasury bill yield, which is seen by many as an indicator of an impending recession.
Renowned economist Mohamed El-Erian, who previously ran the large US bond fund Pimco, criticized the Fed on CBS’ Take on the Nation yesterday for not having contained the topic before. He also said that the US is currently experiencing stagflation, characterized by soft growth, high inflation and eventually higher unemployment.
“The darkest period is when inflation persists, it’s heading to 9%, people start to worry that it’s going to hit 10%, and the next thing, you know, we end up in a recession. And that would be tragic if that happened.” El-Erian said CBS.
Tech and fintech stocks have not fared well as the Fed has become more aggressive with monetary policy. Affirm, Upstart, and SoFi were at the center of the tech boom towards the end of 2021, each soaring to a massive valuation. But they have collapsed and continue to experience pain as the Fed has failed to put a cap on inflation.
Affirm, Upstart and SoFi could face more trouble in the near term, especially if the Fed chooses to raise its benchmark overnight lending rate by 0.75% at its meeting this week, which would be an unprecedented move for the agency.
Furthermore, all three companies are in the lending business, albeit in different guises, and thus face a lack of origination volume if a recession or stagflation really hits here, as El-Erian suggests.
Due to the unique nature of their businesses and the potential for credit deterioration, I am not personally interested in Affirm or Upstart at this time. But I’m keeping an eye on SoFi, because I like the business it’s building and the company serves a much higher quality borrower.