We’re seeing a nasty ripple effect in the stock market on Friday following a development that began on Thursday. What was originally a single-firm issue has now spread to selling pressure in equities. One such example is SoFi (NASDAQ:SOFI). SoFi stock is making new session lows in afternoon trading, currently down about 14% at the time of writing.
Causing the issue are fears spreading through the regional banking industry.
Silvergate Capital (NYSE:SI), a crypto-focused firm, announced it would shut down earlier in the week. The firm said it will “wind down operations and voluntarily liquidate the Bank.”
Then, on Thursday, shares of SVB Financial (NASDAQ:SIVB) collapsed. The stock fell 60% on Thursday on worries that the firm would fail. On Friday morning, the stock was down significantly in pre-market trading as it looked for potential buyers. Then it was halted.
Ultimately, SVB Financial failed on Friday as the Federal Deposit Insurance Corporation (FDIC) took over.
The news dealt a devastating blow to regional banks on Thursday and a notable hit to the financial sector. Now we’re seeing stocks like SoFi fall 14% on the day, while even stalwarts like JPMorgan (NYSE:JPM) have been taking some heat (although shares are up about 1% on the day).
Will the Fallout Hurt SoFi Stock?
Unfortunately, it’s way too early to say. When it comes to contagion, it’s almost impossible to know what firms own what and where their risks are tied. Credit default swaps and other complex financial instruments make it very difficult — or impossible — for the average investor to know what’s going to happen in a timely manner.
It’s completely possible that the issues with SVB Financial are singular and contained. But if there is additional risk, that could create a problematic ripple effect in the system.
Perhaps it’s contained to a few banks. Maybe it’s just a few regionals. Still, when in doubt, investors don’t want the risk — and you’re seeing that play out in names like SoFi stock.
Further, it’s got the S&P 500 and Nasdaq Composite in a compromised technical position, while the CBOE Volatility Index (VIX) is rocketing to 10-month highs. The latter is up 25% today and 50% over the last two days.
When we look at the banking sector overall, and at SoFi stock specifically, it’s easy to say that “all will be fine.” After all, the banks are in a significantly better position than they were going into the Great Recession.
That being said, “risk happens fast” is a saying for a reason, and when it comes to contagion, it spreads like a wildfire. Investors appear content to sell first and ask questions later, particularly ahead of the weekend. In time, we’ll find out if this is a limited-exposure situation or something worse.
One last note: The Federal Reserve can only hike interest rates so aggressively before it starts putting stress on the system. Some of that stress is starting to cause fractures, as we’re seeing this week.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
