Why Upstart, Affirm and MercadoLibre participated today

What happened

Shares in fintech and e-commerce related shares Upstart (UPDATE 2.88%), Confirm (AFRM 10.76%)and MercadoLibre (MELI 5.25%) was up today, up 2.9%, 10.8% and 5.3% respectively.

There wasn’t much in the way of company-specific news today that drove these stocks, but it appears that after several consecutive weeks of declines, the most depressed parts of the market, including high-growth tech and fintech stocks, are looking on. is bound. MercadoLibre also got some good news individually, as a major competitor announced it would be pulling out of some of its markets.

Today’s big gains could have been boosted by short-covering, with many institutional funds positioned against these names amid the twin threats of rising long-term bond yields and potential recession as the Federal Reserve raises interest rates.

However, this week saw some positive data points on these fronts, with some inflation indicators easing and the labor market remaining resilient. Combined with depressed share prices, it is a recipe for big upward movements today.

So what

These stocks had sold off since mid-August due to fears that ongoing inflation and interest rate hikes would lead to a recession, and thus credit losses among lenders.

Upstart is an AI-powered lending platform for personal loans and car loans for buyers with relatively low FICO scores, and the models have been tested this year. Upstart’s 2021 annuals showed increased repayments as inflation crept into consumers’ discretionary incomes, although management said they had adjusted their models in 2022. Since Upstart’s model was to sell its loans to third parties, it faced pressure as loan buyers withdrew from the market mid in the macroeconomic uncertainty, which forces it to keep some loans on the balance sheet and increases the risk.

Confirm, as a buy now pay later platform for buying big tickets at points of sale, also has warranty risk. In its recent earnings release, Affirm noted a more “normalized” credit environment with increasing write-offs and loss provisions. Still, after the extraordinarily low installments during the pandemic and stimulus payments, the company still earns healthy net interest margins.

While MercadoLibre is known as Latin America’s leading e-commerce site, the Mercado Pago fintech segment is quickly becoming more consistent, with much of Mercado Pago’s recent growth coming from both merchants and consumer loans. MercadoLibre’s credit book grew 230% year-over-year, which may cause some consternation among investors who prefer a cleaner, fee-based business.

As credit concerns have weighed on each of these names, the reversal of those concerns is sending each stock higher today. The exact reason is a little hard to pin down; earlier this week, however, US jobless claims came in lower than expected, perhaps allaying concerns that the Federal Reserve is tightening the economy into recession. Oil prices also fell this week, although they are up today. Meanwhile, other inflation indicators such as freight rates and used car prices are in outright deflation, with prices falling in August.

If inflation falls faster than expected, the Federal Reserve will not need to tighten monetary conditions as much. Given how far these economically sensitive stocks had fallen on fears of a recession, they joked about the relatively good news from very low levels.

MercadoLibre may also increase in response to news that the competitor Sea Limited exiting certain Latin American markets. Sea Limited has become a fierce e-commerce competitor in Brazil, but announced it would withdraw from Argentina, Chile, Colombia and Mexico due to cash burn problems. It should benefit MercadoLibre, which has established operations in these countries.

What now

Each of these stocks is down a lot on the year, with MercadoLibre down 31%, Affirm down 76% and Upstart down 82%. The selloff was likely deserved, as each stock was trading very expensive to begin the year and the macroeconomic environment turned against each stock in a big way.

However, we are now in a period where these shares may find a bottom, or overshoot to the downside. Should conditions improve, these growth stocks could be some of the bigger winners; however, it is the reward investors receive for taking on these greater risks, which are by no means overcome yet. Investors will get more data next week, when the consumer price index for August is released on Tuesday, September 13.