Companies with high exposure to rising federal interest rates, which makes borrowing more expensive and causes consumers to wait until rates come down, received welcoming news on Thursday.
The U.S. Bureau of Labor Statistics (BLS) reported a 7.7% year-over-year increase in the consumer price index (CPI) for October, below average economist estimates of 8%, signaling the Fed's historically high rate hikes are starting to cool inflation, giving a welcoming lift to those stocks once thought to be casualties.
What Happened: Shares of Carvana Co CVNA, Upstart Holdings Inc UPST, Affirm Holdings Inc AFRM, Redfin Corp RDFN, and Compass Inc COMP are all up between 18% and 50% since the BLS data was released.
Lower inflation may mean the Fed won't raise rates in December or it will do so in smaller steps, which would make borrowing and financing more accessible to consumers who feel like their income is being siphoned off by rate hikes.
While the majority of the aforementioned stocks are trading at record lows, a dovish turn by the Fed in 2023 could reverse the steep declines seen by those businesses that are vulnerable to lending and financing.
Carvana, for example.
The average interest rate for financing a used car on a 36-month term is 6%, up from 3.98% in March.
Paying an annual percentage rate of 6% instead of 3% could cost consumers nearly $2,000 more in interest over the course of a $40,000, 36-month car loan.
Why It Matters: Rates falling to a more terminal level would surely improve the performance of Carvana's shares (and lending stocks), and with inflation falling more than expected, the rally seen Thursday might last into next week.
For those investors trapped in those high-growth, high-exposure stocks, Thursday’s rally can present itself as a selling opportunity.
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