What's Up and What's Down
Venture Hits the Brakes
The S&P 500 Index had its worst start to the year since the Beatles broke up (that'd be 1970 for those of you not in the know on rock 'n roll history).
The Point: We make it a point not to talk prices here, but let's use the halfway point of the year to explore what's happening in markets. According to Forbes, Occidental Petroleum was the best performing stock in the index during the first six months, while Netflix was the worst. The top performers, by and large, were mostly energy companies. So what's going on? Well, obviously, oil prices have skyrocketed. But there's another factor at play. That is, because of higher interest rates, investors favor companies with steady cash flows over those focusing on growth. That pivot is a sea change from what we've seen over the last decade. With rising interest rates, unprofitable companies (or those that borrow to support expansion plans) have to pay more to borrow money. As a result, many "growth" companies appear to be scaling back their ambitions as the Federal Reserve hikes rates. That typically translates to these companies seeing less growth than previously expected, meaning investors have to readjust their expectations and, with that, the price they're willing to pay for those stocks.
According to Bloomberg, venture capital deal activity dropped by about 23% in the second quarter compared to the first three months of the year.
The Point: This goes hand in hand with our first item. The numbers aren't official yet, but unless there was a quarter-end frenzy, it'd be the lowest level for VC activity since 2020. Ok, so let's try to find a silver lining here. One possible positive from this is that the companies that will continue to attract funding will have to be more disciplined (frugal). Instead of impressing investors with growth stories, they'll need to show progress toward profitability. As a result, when these companies are ready to go public they may already have positive cash flows. That would mean less risk (although arguably less upside as well) for stock market investors.
The company is cracking down on businesses that use the "Friends & Family" option to avoid paying transaction fees.
The Point: We're seeing more companies crack down on loopholes. The most prominent of which is probably Netflix saying it would regulate password sharing. Companies look at all available options to increase revenues during a challenging economic climate. PayPal knows businesses have used the "Friends & Family" option to avoid transaction fees. But up until this point, PayPal has looked the other way. That’s partly because transactions made using the “Friends & Family” option come without fraud protection. PayPal must have realized that taking on that liability is now worth the hassle. While this certainly could boost PayPal's bottom line, it could cause businesses that have taken advantage of the loophole to consider competitors such as Square.
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