The week of chaos on Wall Street closed with drops for stocks. The S&P 500 fell 1.1% on Friday, led by drops in First Republic and other banks. the Dow Jones Industrial Average and Nasdaq the composite is also pulled. This week has been a whipsaw for global markets as worries about banks have intensified following the second and third largest US bank failures in history. The fear is that the turmoil for banks caused by rapidly rising interest rates could drag the economy into a recession. Treasury yields fell again on Friday in part on those fears, along with easing inflation expectations and a fall in US household confidence.
THIS IS A BREAKING NEWS UPDATE. The first AP story follows below.
NEW YORK (AP) – A week of turmoil on Wall Street closed with a sharp drop in stocks Friday as concerns grew about the banking industry and fears rose that the economy could take a nosedive. in a recession.
The S&P 500 was 1.2% lower in late trading, trimming its gains for the week. The Dow Jones Industrial Average fell 441 points, or 1.4%, to 31,805, as of 3 pm Eastern time, while the Nasdaq composite was 1% lower.
This week has been a whipsaw for markets around the world as concerns mount after the second and third largest U.S. bank failures in history. Just a day earlier, markets rallied in relief after two banks on both sides of the Atlantic tapped tens of billions of dollars in cash to strengthening their finances.
But on Friday, some of the hope was washed away, and the pair returned to the fall. In Switzerland, Swiss credit shares fell 8%. On Wall Street, parts of First Republic Bank dropped 32.3% and is heading for a 71% drop for the week.
Both banks have different sets of issues that challenge them, but the main fear is that the banking system may be cracked under the weight of the fastest set of rising interest rates in decades.
“If the Fed goes up this fast, something will break,” said Ross Mayfield, investment strategy analyst at Baird. “There’s a very clear and obvious history of that happening, even in slow, small cycles of rate hikes.”
Analysts are quick to say the current turmoil in the banks not as bad as the 2007-08 financial crisis that devastated the world economy. But the worries still linger over concerns about a recession because problems with banks could mean problems for small and medium-sized companies getting the loans they need to grow.
In “the bigger picture: since 1870 there have been 14 major recessions in the world, all driven by wars, pandemics and banking crises,” investment strategist Michael Hartnett wrote in a BofA report. Global Research.
Banks have borrowed nearly $165 billion from the Federal Reserve last week in a sign of how much stress is in the system.
After years of enjoying historically easy conditions, banks and the economy are now in shock after the Federal Reserve and other central banks raised interest rates at a rapid pace. The measures are intended to control high global inflation.
Higher rates actually help slow inflation by slowing the economy, but they raise the risk of a recession later. They also hurt the prices of stocks, bonds and other investments. That last factor is one of the issues that hurt Silicon Valley Bankwhich collapsed on Friday.
Since then, Wall Street has tried to eliminate banks with similar characteristics to Silicon Valley Bank, such as large depositors with more than $250,000 limit insured by the Federal Deposit Insurance Corp., or large tech startups and others. highly connected people who can spread concerns about a bank’s strength quickly.
That’s why investors are keying in heavily on San Francisco-based First Republic. A group of 11 of the largest 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 a short break on Thursday, its stock also fell on Friday along with other small and medium-sized banks.
“There are still a lot of unknowns,” Baird’s Mayfield said about exactly what types of investments banks have in their portfolios and how quickly they can be turned into cash. “That’s the biggest fear. That’s when markets are usually at their most volatile and most negative. And for most investors who have been in the business for a long time, it’s hard not to bring back memories of 2008, 2009 even though it was very different.
Some of the wildest action was in the bond market, where yields fluctuated as traders sharply recalibrated bets on where the Fed would raise rates.
The yield on the two-year Treasury, which tends to closely track expectations for the Fed, fell to 3.85% from 4.17% on Thursday. It’s up 5% from last week and at the highest level since 2007. That’s a big move for the bond market.
Traders are largely hoping this week’s turmoil will push the Federal Reserve to raise interest rates at its next meeting by a quarter of a percentage point. That would be the same size increase as last month and a half increase of 0.50 points some traders were expecting.
A report on Friday gave the Fed possibly more reason to hold back on accelerating its rate hikes. Expectations for inflation among US consumers fell, according to a preliminary survey by the University of Michigan. That’s key for the Fed, which says such expectations can feed into both virtuous and vicious cycles.
In a more discouraging signal for the economy, confidence also fell. That’s at the heart of the most important part of the US economy: consumer spending.
Easing expectations for the Fed helped many Big Tech stocks lead the market this week. They have their own problems, but they tend to benefit from lower interest rates. Partly because of that, the S&P 500 is still on track for a weekly gain of 1.3%.
Cryptocurrencies are higher this week. Bitcoin is up almost 30%.
The European Central Bank on Thursday increased its key rate by half a percentage point, rejecting the assumption that the size may be reduced due to all the turmoil around the banks.
AP Business Writers Elaine Kurtenbach and Matt Ott contributed.