On Monday, I reported that the Federal Deposit Insurance Corporation had auctioned off the troubled First Republic Bank, one of the three regional banks that collapsed in March’s banking crisis.
Apparently, the sale to JP Morgan Case was insufficient to allay investors’ fears, and bank shares plunged, causing the stock market to sink 300 points.
Stocks tumbled on Tuesday as traders’ fears around contagion in the regional banking sector returned ahead of the Federal Reserve’s rate decision.The Dow Jones Industrial Average fell 367.17 points, or 1.08%, to end at 33,684.53. The S&P 500 slid 1.16% and closed at 4,119.58. The Nasdaq Composite dropped 1.08%, ending the session at 12,080.51. The three major averages fell for a second consecutive session.Bank shares slid, with the SPDR S&P Regional Banking ETF dropping more than 6%. Traders questioned the stability of smaller regional financial institutions after the crisis that engulfed Wall Street in March and brought about the end of Silicon Valley Bank and First Republic Bank. Regional banks PacWest and Western Alliance declined 27% and 15%, respectively.
The hits to the regional banks were widespread.
Some of the sharpest drops came from smaller- and mid-sized banks, which have been under heavy scrutiny as the banking system shows cracks under the weight of much higher interest rates. PacWest Bancorp dropped 25.6%, Western Alliance Bancorp fell 17.3% and Zions Bancorp dropped 12.6%.The KBW Bank Index, which tracks the performance of regional banks, fell as much as 7% on Tuesday. The index is down 28% this year.Three of the four largest U.S. bank failures in history have come since March, and investors have been on the hunt for what could be next to topple or suffer a debilitating exodus by customers.
If the Federal Reserve raises rates later this week, the market may take more of a hit.
Investors are also closely waiting for the outcome of the Fed meeting, expected to be announced Wednesday. The Fed is widely expected to raise rates by a quarter point. Investors’ main focus will be whether Fed Chair Jerome Powell gives any hints of what’s to come at the central bank’s June meeting.Some market participants are placing bets that the central bank will maintain its hawkish tone and could signal a June hike. Others, like Morgan Stanley’s equity strategist Mike Wilson, expect the Fed to pause interest rate hikes and also refrain from rate cuts through the end of the year, resulting in the federal funds rate remaining at a steady level of just over 5% for the foreseeable future.”Should the message delivered at this meeting lead to a re-pricing of bond market expectations for rate cuts in the second half of ’23 (i.e., rate cuts get priced out, leading to an implied path that’s more in line with our economists’ view for a pause), that could ultimately be a negative surprise for equities,” Wilson said in a Monday note.
Experts assure us that we are not experiencing another banking crisis.
Famed financier and healthcare expert Michael Milken doesn’t think the US is trapped in a banking crisis, but the turmoil does offer an important lesson for investors, management teams, and regulators.”This is not the 1980s, it’s not the 1970s, it’s not the Great Financial Crisis,” Milken told Yahoo Finance Live at the 2023 Milken Institute Global Conference (video above). “But it’s a lesson again that we need to match those that buy long-term assets with those that have long-term liabilities like pension funds, insurance companies. And that our financial institutions cannot run a mismatched book of short-term liabilities and long-term assets.”
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