Banks lead stocks down as rate hike, debt deal pend
Stocks slumped Tuesday after shares of beleaguered banks tumbled again and worries worsened about the economy.
Rising fear sent yields sinking in the bond market, while Wall Street waited for the Federal Reserve’s latest move on interest rates and Washington edges closer to what would be a catastrophic default on U.S. government debt.
The S&P fell 1.2% after paring a steeper loss. The Dow Jones Industrial Average dropped 1.1%. The Nasdaq composite sank 1.1%.
Some of the sharpest drops came from smaller and midsize banks, which have been under heavy scrutiny as the banking system shows cracks under the weight of much higher interest rates. PacWest Bancorp dropped 27.8%, Western Alliance Bancorp fell 15.4% and Comerica sank 12.4%.
Three of the four largest U.S. bank failures in history have come since March, and investors have been on the hunt for what could be next to topple or suffer a debilitating exodus by customers.
Regulators seized First Republic Bank at the start of this week and sold most of it to JPMorgan Chase, which had raised hopes that the turmoil could ease.
Also pressuring the market was a report showing U.S. employers advertised the fewest job openings in nearly two years during March. The job market has been one of the main pillars supporting a slowing economy, and a dropoff there would likely mean a recession.
Such pressure is raising the stakes for the Fed, which began a two-day meeting Tuesday on interest rates. The widespread assumption is that policymakers will raise rates today by another quarter of a percentage point. The widespread hope is that it will be the last increase for a long time.
The Fed has jacked up rates at a furious pace from early last year, up to a range of 4.75% to 5% from virtually zero. It’s trying to beat down high inflation, but high rates do that by taking a blunt hammer to the economy.
High rates have already hit the housing market sharply and hurt the banking system. Many investors are preparing for a recession to hit later this year.
That has many traders betting the Fed will halt its rate increases and perhaps even cut them later this year. That would offer the market more breathing room, and stocks have historically done well in the months immediately after the last rate hike.
Some investors anticipate that today, the Fed may not offer encouraging signals that rate increases are over, let alone open the door to rate cuts.
“Admittedly this is a 20/20 hindsight view and the Fed’s job is as tough as it has ever been, but while it would be nice to be finished with the Fed hiking cycle, too much caution in the past, among other factors, caused the current inflation overshoot and there remains a distinct possibility that it could accelerate again, especially given all the uncertain factors in the world today,” said John Vail, chief global strategist at Nikko Asset Management.
In the bond market, the yield on the 10-year Treasury slumped to 3.42% from 3.57% late Monday.
Some of the sharpest action in the stock market was among companies reporting results for the first three months of the year as earnings season stays in high gear. It’s been mostly better than feared.
Arista Networks fell 15.7% despite reporting better profit and revenue than expected. Analysts said investors may have been disappointed that it didn’t raise its forecast for upcoming results even more than it did.
On the winning side was Molson Coors Beverage, which reported adjusted earnings that more than doubled analysts’ expectations. It bubbled up 7.7%.
All told, the S&P 500 lost 48.29 points to 4,119.58. The Dow dropped 367.17 to 33,684.53 and the Nasdaq fell 132.09 to 12,080.51.