Why Upstart Rallied Today

Key Points

• Federal Reserve Chair Jay Powell gave a speech at Jackson Hole this morning, citing a balance of risks in the economy.

• With interest rates still "restrictive," that could mean interest rate cuts in the months ahead.

• Lower rates could spur greater demand for Upstart's personal loans, as long as the economy holds up.

• 10 stocks we like better than Upstart ›

Shares of fintech lender Upstart (NASDAQ: UPST) rallied more than 8% to close the day on Friday.

Upstart is a tech-forward originator of personal loans and, to a lesser extent, auto and home loans. While Upstart doesn't hold loans on its balance sheet but rather sells them to third parties, the level of short-term interest rates can affect the buying appetite of those third parties.

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Thus, when Federal Reserve Chair Jay Powell suggested that the Fed may cut interest rates soon, Upstart jumped on the news.

Powell sees "balanced" risks, pointing to potential cuts

The Federal Reserve has a dual mandate, which includes stable prices and full employment. After the pandemic, inflation surged, and the Fed tightened by raising the federal funds rate at the fastest pace in history. While the Fed began easing last year, the central bank has held the FFR at 4.5% since December.

Rate hikes were a disaster for Upstart, which saw its third-party loan buyers flee from its platform. As a result, Upstart's revenue growth reversed to declines, and the company even resorted to holding some loans on its balance sheet, outside its preferred business model.

But in a highly publicized speech today at Jackson Hole, Wyoming, Fed Chair Jay Powell said, "The baseline outlook and the shifting balance of risks may warrant adjusting our policy stance." In other words, a slowing job market means the Fed is as worried about jobs as it is about inflation today. The result could be more interest rate cuts soon.

In a vacuum, rate cuts are good for Upstart, as it lowers the cost of capital for Upstart's loan buyers and generally increases "risk appetite." That usually means more demand for Upstart's high-rate personal loans, so it's no surprise to see Upstart and many fintech stocks rallying big today.

Image source: Getty Images.

But the speech wasn't an "all-clear"

As I said, rate cuts in a vacuum are good for Upstart. However, if rate cuts are necessary due to job losses, that could affect borrowers' ability to pay back loans and the risk appetite of Upstart's loan buyers. Meanwhile, inflation still remains above the Fed's 2% target, so any acceleration in inflation data in the months ahead could nix any rate cut plans.

In short, while rate cuts would be nice, investors shouldn't get carried away by today's jump. Risks to both the economy and inflation remain.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.