Wall Street’s week of turmoil ended with stocks down. The S&P 500 fell 1.1% on Friday, led by declines in First Republic and other banks. The Dow Jones Industrial Average and the Nasdaq composite also retreated. This week has been a whirlwind for global markets as worries about banks worsen following the second and third largest US bank failures in history. The fear is that the problems for banks caused by rapidly rising interest rates could drag the economy into recession. Treasury yields fell again on Friday partly because of such fears, along with easing inflation expectations and falling confidence among US households.
THIS IS A NEWS UPDATE. AP’s previous story follows below.
NEW YORK (AP) – Wall Street’s week of turmoil ended with stocks sharply lower on Friday as concerns worsened about the banking sector and fears rose that it could drag the economy into recession.
The S&P 500 was 1.2% lower in late trade, trimming its gains for the week. The Dow Jones Industrial Average was down 441 points, or 1.4%, at 31,805 as of 9 p.m. 15 Eastern time, while the Nasdaq composite was 1% lower.
This week has been a whirlwind for markets around the world as concerns mount following the second and third largest US bank failures in history. Just a day earlier, markets rose in relief after two banks on both sides of the Atlantic used tens of billions of dollars in cash to shore up their finances.
But on Friday, some of that hope was washed away and the pair fell back. In Switzerland, the Credit Suisse share fell 8 per cent. On Wall Street, shares of First Republic Bank fell 32.3% and were on course for a 71% plunge for the week.
The two banks have different issues challenging them, but the overriding fear is that the banking system could crack under the weight of the fastest interest rate rises in decades.
“If the Fed hikes this far this fast, something is going to break,” said Ross Mayfield, investment strategy analyst at Baird. “There is a very clear and distinct history of that happening, even in slower, smaller rate hike cycles.”
Analysts have been quick to say that the current chaos for banks does not look nearly as bad as the 2007-08 financial crisis that devastated the global economy. But the problems still raise fears of a recession because trouble for banks could mean trouble for small and medium-sized businesses 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 Global Research report.
Banks have borrowed nearly $165 billion from the Federal Reserve over the past week in a sign of how much stress is in the system.
After years of historically easy conditions, banks and the economy are now in for a shock after the Federal Reserve and other central banks raised interest rates at a blistering pace. The measures are intended to bring the world’s high inflation under control.
Higher interest rates may actually help tame inflation by slowing the economy, but they increase the risk of a recession later. They also hurt the prices of stocks, bonds and other investments. The latter factor was one of the problems that hurt Silicon Valley Bank, which collapsed on Friday.
Since then, Wall Street has tried to weed out banks with similar characteristics to Silicon Valley Bank, such as lots of depositors with more than the $250,000 limit insured by the Federal Deposit Insurance Corp., or lots of tech startups and other highly connected people who quickly can spread concerns about a bank’s strength.
That’s why investors poured so much into San Francisco-based First Republic. A group of 11 of the biggest banks said Thursday they would inject $30 billion into the bank to show their confidence in it and banks in general. After getting a brief respite on Thursday, the stock fell again on Friday along with other small and mid-sized banks.
“There are still a lot of unknowns,” Baird’s Mayfield said of 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 the markets are typically most volatile and most negative. And for most investors who have been in the business for a while, it’s hard not to recall the memory of 2008, 2009, even though looks completely different.”
Some of the wildest has been in the bond market, where yields have fluctuated as traders drastically recalibrate bets on where the Fed will cut interest rates.
The yield on the two-year Treasury note, which tends to closely track Fed expectations, fell to 3.85% from 4.17% late Thursday. It was over 5% last week and at its highest level since 2007. That’s a massive move for the bond market.
Traders largely expect this week’s turmoil to push the Federal Reserve to raise interest rates at its next meeting by just a quarter of a percentage point. That would be the same as last month’s increase and half the 0.50 point increase that some traders had previously expected.
A report on Friday may have given the Fed more reason to hold off on accelerating its rate hikes. Inflation expectations among US consumers are falling, according to a preliminary survey from the University of Michigan. That’s key to the Fed, which has said such expectations can lead to virtuous and vicious circles.
In a more depressing signal for the economy, confidence also fell. It is at the heart of the most important part of the US economy: consumer spending.
Easing expectations for the Fed have helped several Big Tech stocks lead the market this week. They’ve had their own problems, but they tend to benefit from lower interest rates. That’s partly why the S&P 500 is still on track for a weekly gain of 1.3%.
Cryptocurrencies have surged even higher this week. Bitcoin has risen about 30 percent.
The European Central Bank raised its key interest rate by half a percentage point on Thursday, shrugging off speculation that it may cut the rate amid all the turmoil surrounding banks.
AP Business Writers Elaine Kurtenbach and Matt Ott contributed.