Shares of several payments and fintech stocks struggled to shake off a hangover from the Federal Reserve's September meeting yesterday, in which the Fed delivered another big rate hike.
Shares of the large payments rail Mastercard (NYSE: MA) traded nearly 1.5% lower in the final hour of trading today. Shares of the buy now, pay later (BNPL) company Affirm (NASDAQ: AFRM) traded more than 6% lower, and shares of digital bank SoFi (NASDAQ: SOFI) were down nearly 5%.
The Fed concluded its September meeting yesterday with a 0.75% hike to its benchmark overnight lending rate, the federal funds rate. The market had largely expected this, but it was the Fed's comments that seemed to further rattle markets after the rate hike and into today.
Fed Chairman Jerome Powell said the chances for a soft landing will diminish if the Fed has to continue to stay hawkish for longer than it expected.
"No one knows whether this process will lead to a recession or if so how significant that recession would be," Powell said yesterday. "That's going to depend on how quickly wage and price inflation pressures come down, whether expectations remain anchored, and also if we get more labor supply."
The Fed also updated its median forecast for future rate hikes, which now expects the federal funds rate to end the year at 4.4%. With the federal funds rate between 3% and 3.25% and only two Fed meetings to go this year, that implies one more 0.75% rate hike.
Rate hikes have not been good for the likes of payments and fintech companies this year. Affirm, especially, has seen its stock fall 79% as the company faces greater threats of loan losses and potential funding issues as well. Affirm did actually announce an extended partnership with Amazon this morning to offer BNPL solutions for Amazon's customers in Canada, but it was not enough to help the stock today. Recessionary fears have also greatly hurt SoFi's stock this year.
Even Mastercard, a much larger and more established company, has seen its stock price plummet by close to 20% this year. Mastercard's large payment rail is typically seen as a hedge against inflation because the company's transaction fees increase as purchases get more expensive. But if there is a recession and consumer spending slows significantly, that would not bode well for the company.
The outlook continues to be murky as the Fed and the market waits for more proof that inflation has peaked and could soon start to decline. It will take more time for the Fed's rate hikes to work their magic, but Powell worries that the high cost of shelter, including rent, could result in lingering inflation.
The near-term future is also unclear right now, but I still like Mastercard and SoFi long term. Mastercard has developed one of the largest payment rails in the world and achieved scale that will be very hard for most competitors to replicate.
SoFi may see loan growth slow down, but at least it heavily serves a high-quality customer base with high FICO scores and annual incomes. I am staying away from Affirm, as I am unclear how the continued rate hikes will impact loan losses at the firm and its funding ability.
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