NEW YORK — Wall Street’s turbulent week ended with stocks falling. THE&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 fell. This week has been a boost for global markets as concerns mount over banks in the wake of the second and third largest US bank failures in history. The fear is that bank problems caused by rapidly rising interest rates could push the economy into a recession. Treasury yields fell again on Friday in part because of those fears, as well as easing inflation expectations and falling U.S. household confidence.
THIS IS A BREAKING NEWS UPDATE. AP’s previous story follows below.
Wall Street’s turbulent week ends with sharp declines in stocks on Friday as worries deepen about the banking sector and fears grow that it could drag the economy into a recession.
THE&P 500 was down 1.2% late in the session, paring its gain for the week. The Dow Jones Industrial Average was down 441 points, or 1.4%, at 31,805 as of 3 p.m. ET, while the Nasdaq composite was down 1%.
This week has been a boost for markets around the world as concerns grow following the second and third largest US bank failures in history. Just a day earlier, markets rallied after two banks on both sides of the Atlantic dipped into tens of billions of dollars in cash to bolster their finances.
But on Friday, some of the hope was gone and the pair was back down. In Switzerland, shares of Credit Suisse fell 8%. On Wall Street, shares of First Republic Bank fell 32.3% and were on course for a 71% drop for the week.
The two banks face different problems, but the overriding fear is that the banking system will crack under the weight of the fastest round of interest rate hikes in decades.
“If the Fed goes up that far and that fast, something is going to snap,” said Ross Mayfield, investment strategy analyst at Baird. “There is a very clear and obvious history of this, even in slower and smaller rate hike cycles.”
Analysts were quick to say that the current chaos for banks is nowhere near as bad as the 2007-08 financial crisis that wrecked the global economy. But the problems are still fueling worries about a recession, as problems for banks could mean problems for small and medium-sized businesses getting the loans they need to grow.
In ‘the bigger picture: Since 1870, there have been 14 major global recessions, all driven by wars, pandemics & 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, a sign of the level of strain in the system.
After years of historically easy conditions, banks and the economy are now taking a shock after the Federal Reserve and other central banks raised interest rates at a breakneck pace. These measures aim to control high global inflation.
While higher rates may help control inflation by slowing the economy, they increase the risk of a subsequent recession. They also hurt the prices of stocks, bonds and other investments. This last factor was one of the problems that plagued Silicon Valley Bank, which collapsed last Friday.
Since then, Wall Street has attempted to root out banks with characteristics similar to Silicon Valley Bank, such as many depositors with more than the $250,000 limit insured by the Federal Deposit Insurance Corp., or many tech startups and other highly connected people. which can quickly spread concerns about a bank’s soundness.
This is why investors have invested so much in the San Francisco-based First Republic. A group of 11 of the biggest banks said on Thursday it would deposit a total of $30 billion in the bank to show its confidence in it and banks in general. After getting a brief respite on Thursday, its 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 the types of investments banks have in their portfolios and how easily they can be quickly turned into cash. “It’s the biggest fear. This is when the markets are usually the most volatile and negative. And for most investors who have been in the industry for a while, it’s hard not to remember 2008, 2009, even though it looks quite different.
Some of the wildest action took place in the bond market, where yields swung as traders drastically recalibrated bets on where the Fed would take rates.
The two-year Treasury yield, which tends to track Fed expectations closely, fell to 3.85% from 4.17% late Thursday. It was above 5% last week and at its highest level since 2007. This is a massive move for the bond market.
Traders widely 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 increase as last month and half of the 0.50 point rise that some traders had previously expected.
A report on Friday may have given the Fed yet another reason to delay reaccelerating its rate hikes. Inflation expectations among US consumers are falling, according to a preliminary survey from the University of Michigan. That’s key for the Fed, which has said such expectations can fuel virtuous and vicious circles.
A more discouraging signal for the economy, confidence also fell. It’s at the heart of the most important part of the US economy: consumer spending.
Easing expectations for the Fed helped several Big Tech stocks lead the market this week. They’ve had their own problems, but they tend to take advantage of lower interest rates. Partly because of this, the S&P 500 is still on track for a weekly gain of 1.3%.
Cryptocurrencies soared even higher this week. Bitcoin is up around 30%.
The European Central Bank raised its key rate by half a percentage point on Thursday, dismissing speculation that it could cut in size due to all the turmoil around banks.
___
AP Business Writers Elaine Kurtenbach and Matt Ott contributed.