Chaotic week ends on a downswing driven by bank system fears

A whipsaw week for Wall Street closed with drops for stocks Friday as worries worsened about the banking industry and fears rose that it could drag the economy into a recession.

The Standard & Poor’s 500 sank 1.1%, cutting into its gain for the week. The Dow Jones industrial average lost 384 points, or 1.2%, while the Nasdaq composite fell 0.7%.

Markets around the world churned this week as worries rose after the secondand third-largest U.S. bank failures in history.

On Thursday, markets rallied in relief after two banks in investors’ crosshairs bolstered their cash holdings. But on Friday, some of that hope faded and the two banks were back to falling. Credit Suisse shares dropped nearly 7% and shares of First Republic Bank sank nearly 33% to bring their plunge for the week to 71.8%.

The two banks have different sets of issues chalbank’s lenging them, but the overriding fear is that the banking system may be cracking under the weight of the fastest set of interest rate increases in decades.

“If the Fed hikes this far this fast, something will break,” said Ross Mayfield, investment strategy analyst at Baird. “There’s a very clear and evident history of that happening, even in slower, smaller rate-hike cycles.”

Analysts have been quick to say the current chaos for banks looks nowhere near as bad as the 2008 financial crisis that ruined the global economy. But the troubles still feed into concerns about a recession because problems for banks could mean problems for smaller and midsize companies getting the loans they need to grow.

Silicon Valley Bank and Signature Bank have received $143 billion from the Federal Reserve. Other banks have borrowed nearly $165 billion from the central bank over the last week, a sign of how much stress is on the system.

After years of enjoying historically easy conditions, banks and the economy are now getting a shock after the Federal Reserve and other central banks jacked up interest rates at a blistering pace. The moves are meant to get high inflation under control.

Higher rates can indeed help tame inflation by slowing the economy, but they raise the risk of a recession later on. They also hurt prices for stocks, bonds and other investments. That latter factor was one of the issues hurting Silicon Valley Bank, which collapsed March 10. High rates had undercut the value of its bond investments.

Since then, Wall Street has tried to root out banks with traits similar to Silicon Valley Bank’s, such as having lots of depositors with account balances higher than the $250,000 limit that’s insured by the Federal Deposit Insurance Corp., or having a focus on tech startups and other highly connected people who can spread worries about a strength quickly.

That’s why Wall Street has keyed in so much on San Francisco-based First Republic. A group of 11 of the biggest banks on Thursday said they would deposit a combined $30 billion in the bank to show their confidence in it and in banks in general. After getting a brief respite Thursday, First Republic’s stock fell sharply again Friday along with other smaller and midsize banks.

“There’s still a lot of unknowns,” Baird’s Mayfield said about what types of investments banks have in their portfolios and how easily they can be turned into cash quickly.

Some of the wildest action has been in the bond market, where yields have swung as traders drastically recalibrate bets for where the Fed will take rates.

The yield on the two-year Treasury dropped to 3.81% from 4.17% late Thursday. It was above 5% last week, its highest level since 2007. That’s a massive move for the bond market.

Traders largely expect this week’s turmoil to push the Federal Reserve to hike interest rates at its next meeting by only a quarter of a percentage point. That would be half the increase that some traders were earlier expecting.

A report on Friday possibly gave the Fed more reason to hold off on reaccelerating its rate hikes. Expectations among U.S. consumers for inflation in the year ahead fell to their lowest level in nearly two years, according to a preliminary survey by the University of Michigan. That’s key for the Fed, which has said such expectations can feed into virtuous and vicious cycles.

In a more discouraging signal for the economy, though, confidence also fell. That’s at the heart of the most important part of the U.S. economy: consumer spending.

All told, the S&P 500 fell 43.64 points Friday to 3,916.64. The Dow slipped 384.57 points to 31,861.98, and the Nasdaq fell 86.76 points to 11,630.51.