Wall Street was spooked, and stocks fell on Friday on worries about what would come next under the weight of interest rate hikes following the biggest U.S. bank failure for almost 15 years.
The S&P 500 fell 1.4% to end its worst week since September. That’s despite an expected report on Friday showing increasing the wages of workers is slow and other signals that Wall Street wants to see cooling inflation pressure.
the Dow The Jones Industrial Average fell 345 points, or 1.1%, while the Nasdaq The composition fell 1.8%.
Some of the sharpest market declines also came from the financial industry, where stocks fell for a second day.
Regulators seized Silicon Valley Bank in a surprise move midday after shares of its parent company, SVB Financial, fell more than 60% this week. The company, which serves the industry surrounding startup companies, is trying to raise money to ease a crunch. Analysts say this is a relatively rare situation, but it still raises concerns that a wider banking crisis could erupt.
Friday’s struggles came amid what strategists in a BofA Global Research report called “the crashy vibes of March.” Markets rumbled on worries that high inflation would prove difficult to beat, forcing the Federal Reserve to speeding up its climbs again to interest rates.
Such increases may reduce inflation by slowing the economy, but they drag down the prices of stocks and other investments. They also raise the risk of a recession later.
Higher rates are likely to hit the hardest in investments seen as the riskiest and most expensive, such as cryptocurrencies and the turmoil surrounding money-losing Silicon Valley startups.
“There are some cracks starting to show,” said Brent Schutte, chief investment officer of the Northwestern Mutual treasure. “The SVB is a warning for the Fed that their actions are starting to have an effect.”
The Fed has already raised rates at the fastest pace in decades and is taking other steps to reverse its massive support for the economy during the pandemic. This effectively pulls money out of the economy, something Wall Street calls “liquidity,” which tightens the screws on the system.
“This is a warning sign that liquidity is drying up, and the weakest areas are starting to show it, which tells me that the rest of the economy is not too far behind,” Schutte said.
Wall Street in February gave up hope that cuts in interest rates could come later this year. Concerns then flared this week that rates were set to go even higher than expected after the Fed said it could accelerate the size of its rate hikes.
Friday’s work report helped calm some of the concerns, which led to some up-and-down trading. Overall hiring was warmer than expected, which could be a sign that the labor market remains too strong for the Fed’s liking.
But the data also showed a slowdown from January’s jaw-dropping hiring rate. More importantly for markets, average hourly earnings for workers rose the least in February than economists expected.
That’s important for Wall Street because the Fed is focusing on wage growth especially in its fight against inflation. It worries that too high profits could cause a vicious cycle that worsens inflation, even if the increase helps workers who are struggling to keep up with rising register prices.
Among other signs of a cooling but strong labor market, the unemployment rate has risen and the percentage of Americans who have or are looking for jobs has increased slightly.
Such trends mean traders are backing off bets that the Fed will eventually return to a 0.50 percentage point hike later this month. Many are now betting on the Fed sticking with a more modest 0.25 point hike, according to CME group.
Last month, the Fed slowed that pace after initially hiking by 0.50 and 0.75 points.
Such expectations, along with concerns about banks, helped send Treasury yields lower.
The yield on the 10-year Treasury fell to 3.69% from 3.91% on Thursday, a sharp move for the bond market. It helps in setting rates for mortgages and other important loans.
Some of the worst declines on Wall Street came from banking stocks on worries about who else could suffer a currency crisis if interest rates stay too high and the customers take deposits. That will cause pain because a flight of deposits will force them to sell bonds to raise money, just as higher interest rates will lower prices for bonds.
In addition to SVB Financial’s struggles, Silvergate Capital also said this week it was voluntarily closing its bank. It serves the crypto industry and warns that it may be “not very well capitalized.”
Stock losses were heaviest among regional banks. First Republic Bank fell to 14.8%. It filed a statement with regulators to restore “strong capital and liquidity positions.”
Charles Schwab lost another 11.7% after dropping 12.8% Thursday “as investors stretched for readings” from the SVB crisis, according to UBS analysts. Analysts called them “logical but superficial” because of the differences in how companies get their deposits.
Bigger banks, which were stress-tested by regulators after the 2008 financial crisis, held up better. JPMorgan Chase increased by 2.5%.
All told, the S&P 500 fell 56.73 points to 3,861.59. The Dow lost 345.22 to 31,909.64, and the Nasdaq dropped 199.47 to 11,138.89.
AP Business Writers Joe McDonald and Matt Ott contributed.
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