NEW YORK (AP) – Fear swept through Wall Street on Friday, and stocks fell sharply after the biggest banking crash in more than a decade raised concerns about what could break as interest rates continue to rise.
The S&P 500 was 1.7% lower in afternoon trade and on pace for its worst week since last June. This is despite a much-anticipated report on Friday showing that wage increases for workers are slowing and other signals Wall Street wants to see of cooling pressure on inflation.
The Dow Jones Industrial Average fell 401 points, or 1.2%, to 31,854 at 1:40 p.m. ET, while the Nasdaq composite was 1.9% lower.
Some of the market’s sharpest declines again came from the financial industry, where shares fell for a second day.
SVB Financial, which ran Silicon Valley Bank and served the startup industry, fell more than 60% this week as it raised cash to ease a crisis. Analysts have said it is in a relatively unique situation, but it has still led to concerns that a wider banking crisis could erupt. Regulators took over the bank on Friday and named the Federal Deposit Insurance Corp. to its recipient.
Friday’s games come amid what strategists in a BofA Global Research report called “the tumbling sentiments of March.” Markets have been jittery recently on concerns that high inflation is proving difficult to drive down, which could force the Federal Reserve to accelerate its rate hikes again.
Such increases can undercut inflation by slowing the economy, but they also drag down the prices of stocks and other investments and increase the risk of a recession later.
“There are starting to be cracks showing,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth. “The SVB is a warning to the Fed that their actions are starting to have an impact.”
The Fed has already raised interest rates at the fastest pace in decades and taken other steps to reverse its massive support for the economy during the pandemic. It effectively pulls money out of the economy, something Wall Street calls “liquidity,” which can tighten the screws on the system.
“This is a warning sign that liquidity is draining and the most vulnerable areas are starting to show it, which tells me that the rest of the economy is not too far behind,” Schutte said.
Wall Street already gave up hope in February that interest rate cuts could come later this year. Concerns then flared this week that interest rates are set to go even higher than expected after the Fed said it could accelerate the size of its rate hikes.
Friday’s jobs report helped quell some of those concerns, leading to some up-and-down trading. Total hiring was warmer than expected, which may be a sign that the labor market remains too strong for the Fed’s liking despite the fastest rate hikes in decades.
But the data also showed a slowdown from January’s astonishing hiring rate. More importantly for markets, average hourly wages for workers rose 0.2% in February from January.
That was a slowdown from January’s 0.3% rise and was lower than the 0.4% acceleration economists had expected. This number is crucial on Wall Street because the Fed focuses on wage growth in particular in its fight against inflation. It worries that too high gains could cause a vicious cycle that worsens inflation, even as raises help workers struggling to keep up with rising prices at the register.
Among other signs of a cooling but still resilient labor market, the unemployment rate rose and the percentage of Americans with or looking for work rose slightly.
Such trends mean traders are swinging back their bets on the size of the Fed’s next rate hike.
After largely believing the central bank would go back to a 0.50 percentage point hike later in the month, traders are now leaning slightly against the chance that it will stick with a more modest 0.25 point hike, according to CME Group.
Last month, the Fed slowed to that pace after earlier hikes of 0.50 and 0.75 points.
The expectations, along with worries about the banks, helped send government interest rates sharply lower.
The yield on the 10-year Treasury note fell to 3.70% from 3.91% late Thursday, a sharp move for the bond market. It helps set interest rates for mortgages and other important loans.
The two-year Treasury yield, which is moving more in line with Fed expectations, fell to 4.61% from 4.87%. That was over 5% earlier in the week and at the highest level since 2007.
Some of the sharpest declines on Wall Street came from bank stocks on worries about who else might suffer a cash crunch if interest rates stay higher for longer and customers withdraw deposits. That would create pain because a flight of deposits could force them to sell bonds to raise cash, just as higher interest rates drive down prices for those bonds.
In addition to SVB Financial’s struggles, Silvergate Capital also said this week that it is voluntarily closing its bank. It served the crypto industry and had warned that it could end up “less than well capitalized.”
Share losses were greatest in regional banks. First Republic Bank fell 21.5 per cent. It filed a statement with regulators to reiterate its “strong capital and liquidity positions.”
Charles Schwab lost another 7.8% after falling 12.8% on Thursday “as investors stretched for read-throughs” from the SVB crisis, according to analysts at UBS. The analysts called them “logical but shallow” because of differences in how companies get their deposits.
Losses were more modest at the biggest banks, which have been stress-tested by regulators since the 2008 financial crisis.
AP Business Writers Joe McDonald and Matt Ott contributed.