Stocks rally on Wall Street, even the most beaten-down banks

By Stan Choe, The Associated Press on March 21, 2023.

NEW YORK (AP) – Stocks rallied on Wall Street, including the banks most beaten down by the industry’s crisis. The S&P 500 rose 1.3% Tuesday, its first back-to-back gain in two weeks, after Treasury Secretary Janet Yellen said the government could offer the banking industry more assistance if needed. The Dow and the Nasdaq also rose. Markets around the world have pinballed this month on worries the banking system may be cracking under the pressure of the fastest set of hikes to interest rates in decades. Treasury yields rose in another dramatic swing as the Federal Reserve begins its latest meeting on interest rates.

THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.

NEW YORK (AP) – Stocks are rising on a calming Wall Street Tuesday, even the banks most beaten down by the industry’s crisis, amid hopes for more help from the U.S. government.

The S&P 500 was 1.2% higher in late-afternoon trading. The Dow Jones Industrial Average was up 262 points, or 0.8%, at 32,507, as of 3:29 p.m. Eastern time, while the Nasdaq composite was 1.5% higher.

Markets around the world have pinballed sharply this month on worries the banking system may be cracking under the pressure of the fastest set of hikes to interest rates in decades. If the S&P 500 squeezes out a gain, it would mark its first back-to-back rise in two weeks.

In the U.S., shares of smaller and mid-sized banks rose after Treasury Secretary Janet Yellen told a bankers’ group more government assistance “could be warranted” if risks arise that could bring down the system.

“The actions of making sure that deposit holders feel safe with their money where it is has really helped the markets be able to rally despite the concern about some other banks having potential issues,” said Mary Ann Bartels, chief investment strategist at Sanctuary Wealth.

Earlier this month, the U.S. government said it would make depositors at Silicon Valley Bank and Signature Bank whole, even those with more than the $250,000 limit insured by the Federal Deposit Insurance Corp. They were the second- and third-largest U.S. bank failures in history.

They had struggled as depositors rushed to pull their money out en masse. Such runs can topple a bank, and investors have since been hunting for the next one that could fall. Much focus has been on First Republic Bank, which shares some similar traits with Silicon Valley Bank, and its stock had lost 90% for the month through Monday.

It jumped 34.4% Tuesday.

Other smaller and mid-sized banks also rallied, including an 8.1% climb for Comerica and an 5.8% gain for Zions Bancorp.

Hopes for the banking industry began to turn over the weekend after regulators pushed together two huge Swiss banks. Shares of both banks in that deal rose Tuesday in Switzerland, including a 12.3% jump for acquirer UBS. Credit Suisse, meanwhile, rose 2.9% after tumbling a day earlier.

Credit Suisse had longstanding problems that were relatively unique, but all banks on both sides of the Atlantic have the shared challenge of navigating a world with much higher interest rates than a year earlier.

Central banks have jacked up rates at a blistering pace in hopes of getting high inflation under control. But such moves act like huge hammers with little nuance. They try to bring down inflation by slowing the entire economy.

That raises the risk of a recession later on. Higher rates also hurt prices for stocks and other investments. That’s one of the factors that hurt Silicon Valley Bank, which saw the value of its bond investments drop with the rise in rates.

The Federal Reserve is beginning its latest meeting on interest rates Tuesday, with an announcement slated for Wednesday.

Earlier this month, much of Wall Street was bracing for the Fed to reaccelerate its hikes and raise by 0.50 percentage points. A string of reports on the economy came in hotter than expected, including data on the job market, retail sales and inflation itself.

But all the turmoil in the banking industry has traders betting the Fed will stick with an increase of 0.25 points.

Traders are even beginning to bet that the Fed may cut interest rates later this year. Rate cuts can act like steroids for markets, and they would also give the economy and banks more room to breathe. On the downside, they could give inflation more fuel.

“Can the Federal Reserve really continue to hike rates in the face of a banking crisis?” Clifford Bennett of ACY Securities said in a report. “There are ongoing stresses in the banking system that will only grow with further rate hikes.”

Beyond its decision on rates, the Federal Reserve on Wednesday will also release its latest projections on where policymakers see inflation and interest rates heading in upcoming years. While so much is still in flux because of the banking industry’s troubles, Wall Street tends to take the Fed’s roadmaps seriously.

“It’s about the future direction of where the Fed is moving,” Bartels said. “(That) is what the markets will respond to.”

Stocks could be in for more volatility Wednesday should the Fed signal that it may re-evaluate whether to consider raising rates further, even if it ends up pausing in the near term, she added.

“The market has begun to price in significant rate cuts further out in the year, and we’ve been down this road before where the market expects rate cuts and the Fed dials them back,” Bartels said.

In markets abroad, stocks rallied across Europe and Asia.

In the bond market, huge swings continue to rock the market. Yields have been mostly plunging this month on expectations for an easier Fed. The yield on the two-year Treasury, for example, tumbled from its highest level since 2007, above 5%, back below 4%, which is a massive move for it.

It rose to 4.18% from 3.97% late Monday.

The 10-year Treasury yield, which helps set rates on mortgages and other important loans rose to 3.59% from 3.44%.

The higher yields helped knock down stocks on Wall Street that are known for paying relatively fat dividends. When bonds are paying more in interest, they can peel away investors who are searching for income. Utility stocks in the S&P 500, for example, dropped 2.3%. That helped to check the market’s overall gains.

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AP Business Writers Joe McDonald, Matt Ott and Alex Veiga contributed.

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