Stocks fall above chaotic week fueled by bank fears

A whiplash week for Wall Street ended on Friday with stocks falling on mounting concerns about the banking sector and fears it could drag the economy into recession.

The Standard & Poor’s 500 was down 1.1%, a gain for the week. The Dow Jones Industrial Average lost 384 points, or 1.2%, while the Nasdaq Composite lost 0.7%.

Markets around the world reeled this week as concerns mounted following the collapse of the second and third largest US bank in history. On Thursday, markets rose in relief after two banks in the sights of investors increased their cash.

But on Friday, some of that hope faded and the two banks ran into trouble again. Shares of Credit Suisse fell nearly 7% and shares of First Republic Bank fell nearly 33%, bringing their plunge to 71.8% for the week.

The two banks have several issues challenging them, but the prevailing fear is that the banking system could collapse under the weight of the fastest rate hikes in decades.

“If the Fed goes that far so quickly, something is going to break,” said Ross Mayfield, investment strategy analyst at Baird. “There is a very clear and unequivocal history of what has happened, even in slower, smaller cycles of rate hikes.”

Analysts were quick to say that the current chaos for banks doesn’t seem nearly as bad as the 2008 financial crisis that devastated the global economy. But the problems still fuel fears of a recession, as problems for banks could mean problems for small and medium-sized businesses getting the credit they need to thrive.

“Broadly speaking, there have been 14 major global recessions since 1870, all caused by wars, pandemics and banking crises,” investment strategist Michael Hartnett wrote in a BofA Global Research report.

Silicon Valley Bank and Signature Bank received $143 billion from the Federal Reserve. Other banks borrowed nearly $165 billion from the central bank last week, a sign of how tense the system is.

After years of historically easy conditions, banks and the economy are now in for a shock after the Federal Reserve and other central banks hiked interest rates at lightning speed. The measures are intended to bring the high inflation under control.

Higher interest rates may actually help dampen inflation by slowing down the economy, but they increase the risk of a later recession. They also negatively affect the prices of stocks, bonds and other assets. That last factor was one of the problems that hurt Silicon Valley Bank, which collapsed on March 10. High interest rates undermined the value of his bond investments.

Since then, Wall Street has tried to weed out banks with characteristics similar to Silicon Valley Bank, such as: Many depositors with assets in excess of Federal Deposit Insurance Corp. be insured or focus on technology startups. and other highly connected individuals who can quickly address concerns about a bank’s power.

That’s why Wall Street bet so heavily on San Francisco’s First Republic. A group of 11 of the largest banks said on Thursday they would deposit a total of $30 billion into the bank to show their confidence in them and banks in general. After a brief pause on Thursday, First Republic shares fell sharply again on Friday, along with other smaller and mid-cap banks.

“There are still a lot of unknowns,” Baird’s Mayfield said of the types of investments banks have in their portfolios and how quickly they can be turned into cash. “That’s the biggest fear. This is when the markets are typically the most volatile and negative. And for most investors who have been in the business for a while, it’s hard not to go back to 2008, 2009, even though you see it looks very different.”

Some of the wildest action took place in the bond market, where yields fluctuated as traders drastically recalibrated their bets on where the Fed will take rates.

The yield on the two-year government bond fell from 4.17% at the end of Thursday to 3.81%. It was over 5% last week, the highest level since 2007. This is a huge step for the bond market.

Traders widely expect this week’s turmoil to prompt the Federal Reserve to raise interest rates by just a quarter of a point at its next meeting. That would be the same size as last month’s increase and half the increase some traders had previously expected.

A report from Friday may have given the Fed more reason to hold off on accelerating rate hikes than previously suggested. U.S. consumer inflation expectations for the coming year have fallen to the lowest level in nearly two years, according to a preliminary study from the University of Michigan. That’s essential for the Fed, which has said such expectations can lead to positive and vicious circles.

But confidence also fell, a discouraging signal for the economy. This is at the heart of the most important part of the US economy: consumer spending.

Easing expectations for the Fed helped several big tech companies lead the market this week. They’ve had their own issues, but they tend to benefit from lower interest rates. Partly because of this, the S&P 500 continued to post gains this week.

Overall, the S&P 500 fell 43.64 points to 3,916.64 on Friday. The Dow Jones fell 384.57 points to 31,861.98 and the Nasdaq fell 86.76 points to 11,630.51.

Cryptocurrencies have shot even higher this week. Bitcoin rose by more than 30%.

AP wAuthors Elaine Kurtenbach and Matt Ott contributed to this report.