What is the Commonality between Rate Hikes and ChatGPT: They Kill Stocks
There were two bloodsheds in the markets yesterday. One was caused by the fear of more regional banks collapsing and the other was ChatGPT’s impact on education businesses.
The collapse of First Republic Bank has reopened the wounds of the recent banking crisis, leaving investors questioning the extent of the damage and the potential for further bank failures.
The SPDR S&P Regional Banking ETF (KRE) was down by more than 6% in a day.
By identifying the regional bank stocks that have experienced the greatest declines, we may gain insight into which banks are most vulnerable to failure. The following table displays the regional bank stocks that dropped by over 10% yesterday.
Of note are two specific banks, PacWest Bancorp (PACW) and Metropolitan Bank (MCB), which experienced the most significant declines, with their stock prices falling by over 20%. These banks may be more susceptible to a collapse.
The situation becomes precarious when a sufficient number of depositors lose confidence in their banks, as their actions of withdrawing funds can turn into a self-fulfilling prophecy and exacerbate a bank run.
Ultimately, the survival of banks is determined not by their fundamental strength, but by the perceived safety among the masses who entrust them with their funds.
The potential failure of PacWest Bancorp and Metropolitan Bank may not trigger a banking crisis, larger banks can always absorb them as they are not considered critical institutions.
However, it's worth noting that investing in these banks' stocks may not be wise as, in the event of receivership, depositors are typically saved at the expense of shareholders. As a result, shareholders may face significant losses, with the bank only fetching a fraction of its original value or, in some cases, no value at all.
I was surprised to learn that Standard Chartered customers had made First Republic Bank a top trade, with 99% of trades being purchases during the period of April 24th to 28th. This occurred prior to the announcement of JPMorgan Chase's takeover of the bank's assets.
Trading of First Republic Bank stock has ceased over the weekend due to its liquidation process, which prioritizes the payment of creditors and depositors. Shareholders may receive the remaining assets, but it's possible that there will be no assets left for them. Therefore, I don't believe it's a worthwhile endeavor to invest in distressed banks like this.
The next issue is with education stocks. Chegg (CHGG) is a edtech company that helps students get textbook rentals, homework help, online tutoring, and study resources.
Following the release of its financial results, Chegg reported a 7% decrease in revenue, which CEO Dan Rosensweig attributed to ChatGPT as a contributing factor to the drop in demand.
It's not unexpected that ChatGPT could offer students the answers they seek for free, rather than paying for Chegg's services.
Chegg's stock price plummeted by 48% on the previous day, despite the announcement of a partnership with OpenAI to develop CheggMate.
