Wall Street on Friday closed lower, marking the end of a tumultuous week dominated by an unfolding crisis in the banking sector and the gathering storm clouds of possible recession.
All three major indices ended the session deep in negative territory, with financial stocks down the most among the major sectors of the S&P 500.
For the week, while the benchmark S&P 500 and the NASDAQ closed higher than their previous Friday results, up 1.43 percent and 4.41 percent respectively, the Dow Jones Industrial Average posted a weekly decline of 0.15 percent.
SVB Financial Group announced it would seek Chapter 11 bankruptcy protection, the latest development in an ongoing drama that began last week with the collapse of Silicon Valley Bank and Signature Bank, which sparked fears of contagion throughout the global banking system.
The sell-off “is a bit of an overreaction,” said Oliver Pursche, senior vice president at Wealthspire Advisors in New York. “However, there is validity to some of the concerns regarding overall liquidity and a potential liquidity crunch.”
Those concerns have spread to Europe, as Credit Suisse Group AG shares stumbled over liquidity worries, prompting policymakers to scramble to reassure markets.
“This goes a lot further than just a run on SVB or First Republic, it goes to the real impact these interest rate hikes are having on capital and balance sheets,” Pursche said. “And you’re seeing it impact large institutions like Credit Suisse, and that’s got people rattled.”
Over the past two weeks, the S&P Banking Index and the KBW NASDAQ Regional Banking Index plunged by 4.6 percent and 5.4 percent respectively, their largest two-week drops since March 2020.
First Republic Bank plummeted 32.8 percent after the bank announced it was suspending its dividend, reversing Thursday’s surge, which was sparked by an unprecedented US$30 billion rescue package from large financial institutions
Among First Republic’s peers, PacWest Bancorp fell 19 percent, while Western Alliance slid 15.1 percent.
US-traded shares of Credit Suisse also closed sharply lower, down 6.9 percent.
Investors now turn their gaze to the US Federal Reserve’s two-day monetary policy meeting next week.
In view of recent developments in the banking sector and data suggesting a softening economy, investors have adjusted their expectations regarding the size and duration of the Fed’s restrictive interest rate hikes.
“This mini banking crisis has increased the chance of recession and accelerated the slowdown timeline for the economy,” Pursche said. “It’s natural that the Fed should re-examine its course of action, but it’s still very clear that while inflation is slowing, it’s still very much a concern and needs to be brought under control.”
At last glance, financial markets have priced in a 60.5 percent likelihood that the central bank will raise its key target rate by 25 basis points, and a 39.5 percent probability that it will let the current rate stand, CME Group Inc’s FedWatch tool showed.
The Dow Jones fell 384.57 points, or 1.19 percent, to 31,861.98, the S&P 500 lost 43.64 points, or 1.10 percent, to 3,916.64 and the NASDAQ Composite dropped 86.76 points, or 0.74 percent, to 11,630.51.
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