Stocks fall to cap chaotic week driven by fears about banks
Stocks fell Friday to end a whipsaw week on Wall Street amid rising fear among investors that turmoil in the banking industry could drag the economy into a recession.
The S&P 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 past week as worries rose following the second- and 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 the hope washed out, and the pair went back to falling. In Switzerland, Credit Suisse shares dropped 8%. On Wall Street, 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 challenging them, but the overriding fear is that the banking system may be cracking under the weight of the fastest set of hikes to interest rates 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 2007-08 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 mid-sized companies getting the loans they need to grow.
In “the biggest picture: since 1870 there have been 14 big world recessions, all driven by wars, pandemics & banking crises,” investment strategist Michael Hartnett wrote in a BofA Global Research report.
Banks borrowed nearly $165 billion from the Federal Reserve over the last week in a sign of how much stress is in the system.
After years of enjoying historically easy conditions, banks 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 the world’s 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 regulators seized a week ago.
Since then, Wall Street has tried to root out banks with similar traits to Silicon Valley Bank, such as lots of depositors with more than the $250,000 limit that’s insured by the Federal Deposit Insurance Corp., or lots of tech startups and other highly connected people that can spread worries about a bank’s strength quickly.
That’s why investors 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 banks in general. After getting a brief respite Thursday, its stock fell again Friday with other smaller and mid-sized banks.