This week the Federal Reserve announced a 50bps interest rate cut taking the Fed Funds Target rate to 4.75 – 5 percent, the first cut in over four years, and signaling that the easing cycle has commenced. The announcement was one of the most anticipated and talked about in recent history.
Coming off the back of sticky inflation, a softening labor market, and persistent global macro and political volatility, the market’s anxiety for a soft landing was apparent – you could cut the tension with a knife. Many analysts were arguing for a 25pbs cut and notably, including Fed governor Michelle Bowman who dissented on the size of the cut, the first since 2005.
Michael P. Reinking, CFA, a senior market strategist at the New York Stock Exchange said, “Coming into the Blackout Window part of the reason I had originally thought the Committee would move 25bps was that it typically likes to move methodically with clear messaging to the market.”
Adds Reinking, “One of the risks to not messaging a larger cut in advance was that this would have caused volatility in currency markets, which if you rewound the clock to the beginning of August, was at the epicenter of the volatility with the unwind of carry trades. However, well placed comments from former Fed officials in the media late last week addressed that concern increasing the odds of a larger cut.”
Jerome Powell, the Fed Chair commented in Wyoming last month, “We will do everything we can to support a strong labour market as we make further progress towards price stability.”
Many market analysts are predicting one further base rate cut in 2024 and for interest rates to fall to around 4 percent by the end of 20225. The Fed’s 2025 median projection is for an additional 100bps of cuts to 3.4 percent. Officials see rates back to neutral in 2026 at 2.9 percent with the longer run estimate also ticking higher again.
On the 2025 projection Reinking commented, “This was not as aggressive as markets were looking for coming in as futures were pricing under 3 percent, but I think the market took some comfort in the fact that 8 of the 19 officials were below 3.25 percent.”
The Bulls Are Back And Tech Isn’t Leading
While analysts keep an eye on the labor market, the move appears to have attracted the bulls back to the stock market with the S&P hitting a record high of 5,723.88 on Thursday as global stocks rose in the aftermath of the substantial cut. Of note, the Bank of England appeared unphased by the Fed move and left rates unchanged at 5 percent on Thursday.
The S&P has performed historically well during this recent inflationary period with many firms largely protected from rising rates due to locking in lower rates in 2020 and 2021. Conventional wisdom is that lower interest rates stimulate economic activity by reducing borrowing costs for businesses and consumers, which tends to benefit the stock market. S&P 500 performance, however, following rate cut cycles can vary significantly.
The summer sell off of tech stocks had the MAG7 down by over 12 percent in July from their June all time high. The stock market has recovered most of the losses suffered in its summer selloff, but it isn’t being led by Big Tech, which has slumped with the Bloomberg Magnificent 7 Index falling 5.3 percent this week, and both real estate and utilities gaining 11 percent.
The price of bitcoin popped on the Fed’s announcement to $62,524 on Thursday morning, a 1.3 percent gain pushing it above the $60,000 mark for the first time in September. According to CoinMarketCap, the broader crypto market rose 4.4 percent reaching a $2.16 trillion market capitalization. Risky assets like crypto tend to get a bump from lower borrowing costs as assets are often leveraged.
Green Shoots For Fintech Funding
Global fintech funding suffered what some called a “bloodbath” in 2023 following a decade of hyper growth, and bull years in 2021 and 2022 coming out of COVID-19. It is estimated that fintech funding declined by an estimated 70 percent in 2023 from an all time high in 2021 estimated globally at $230 billion.
The poor investment figures were part of a longer global slowdown in early stage venture tech and innovation as the era of cheap money disappeared with rising inflation and interest rate levels not seen for 40 years. Silicon Valley Bank’s bankruptcy and FTX blowing up crypto did not help. The GenAI hype, sucking the funding out of the remaining fintech funding pool, also didn’t help.
Fintechs found it increasingly difficult to access the capital they needed to grow.
Fast forward to today, the U.S. market led global fintech funding in H1 2024 with $7.3 billion across 599 deals with the half year results in line with full year 2014 results. Fintech valuations have fallen, considerably, and now is the time to focus on value investments in those fintechs that have regulatory approvals and can build strong revenue lines, rapidly. Long gone are the days of investors funding a powerpoint vision.
Buyouts are popular vehicles and market consolidation is at the top of the agenda for many VCs, investors and fintechs. Distressed pre-revenue assets that cannot raise further capital are also offering bigger and better funded fintechs the opportunity to add horizontal and vertical bolt-ons that are often market ready, especially those in capital markets and financial market infrastructure.
There are a lot of opportunities to acquire world class fintech and talent at a significant discount if you have the cash. As importantly, cheap(er) money is on its way back, the fuel for the fintech bull run, and over the next two to three years, we will see fintech funding increase, but in a much more controlled manner, especially in the short term.
Fintech has come of age, and the wild days of youthful exuberance are less tolerated in many investor camps. Now, beyond exuberance, investors are looking for the adults in the room, and the rapid revenue growth story, at more normalized valuations. Fasten your seatbelt, and get ready for the next era of fintech emerging in 2025.
Read the full article here
