Many technology and fintech stocks have suffered this week, in large part due to the release of the minutes of the Federal Reserve’s December meeting.
Cathy Woods shares Ark Innovation ETF (NYSEMKT: ARKK) It was down nearly 10% for the week as of Thursday’s market close, while shares of Buy Now, Pay Later (BNPL) Confirms (NASDAQ: AFRM) It decreased by about 19%. Artificial intelligence lender stocks upstart holding (NASDAQ: UPST) and digital banking application SoFi Technologies (NASDAQ: SOFI) It was down more than 21% and about 13%, respectively, during the week.
There doesn’t seem to be much news for the company regarding any of these stocks or ETFs. Instead, they are reacting to macroeconomic news and the Federal Reserve’s new direction, similar to what they have done over the past few months.
It’s hard to believe, but earlier this year, many believed that the Fed would not seek to raise the overnight lending rate, and the federal funds rate, until 2023, and perhaps even 2024. But that soon changed So with inflation soaring and the Fed the word “temporary” is finally retired when talking about inflation. Towards the end of 2021, the Fed began signaling that it would scale back and end the bond-buying program that began at the start of the pandemic. The Fed is also indicating that it may raise interest rates in March, and the new surprise from the December minutes is that the Fed may actually start shrinking its balance sheet after the first rate hike begins.
When the Fed moves to shrink its balance sheet, as opposed to the bond buying it was doing, also known as quantitative easing, it will actually remove liquidity and reduce the country’s money supply, which could make the stock market a tough place to be.
The FOMC meeting minutes showed [Federal Open Market Committee] “The omicron variable is unlikely to slow down,” Anna Wong, Bloomberg’s chief US economist, said in a research note. The take-off at the March meeting has increased significantly and the Fed spokesperson will be watching closely ahead of the January meeting for further indications.”
Since the release of the Federal Reserve’s December meeting minutes, long-term bond yields have soared. The yield on US 10-year Treasuries grew to 1.73%, compared to just over 1.5% at the end of 2021. Higher bond yields are usually bad for technology and growth stocks because they provide investors with a higher return on risk-free assets, making Difficult to support high ratings. Stocks like Upstart and Affirm soar to huge valuations in 2021. The Ark Innovation ETF is filled with high-growth technology stocks like TeslaAnd general, And Zoom video communication. SoFi reached a very high rating in 2021 as well.
Many of these technology and fintech stocks have great potential as they pose disruption to their future industries. But I thought stocks like Upstart and Affirm went up too big, too fast in 2021, so I think a pullback was to be expected.
Now, the valuations are better but there could still be tough market conditions for 2022, as the Fed has yet to make its first rate hike or start coming off its balance sheet just yet. If SoFi can get hold of its expected banking charter, that could help the company quite a bit because banks are usually more of an inflation hedge.
I’m a little more concerned about Affirm at the moment due to regulatory scrutiny around BNPL and potential credit issues in a higher rate environment. I still like many fintech stocks over the long term, but I think it’s appropriate for valuations to become more in line with reality at the moment.
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