Wall Street swings as questions about banks, rates linger

By Stan Choe, The Associated Press on March 23, 2023.

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NEW YORK (AP) – Stocks closed mostly higher after a wobbly day of trading as worries continued to rise about the banking industry. The S&P 500 rose 0.3% Thursday after veering all the way from a 1.8% gain earlier in the day to a 0.4% loss. The Dow Jones Industrial Average posted a slight gain of 0.2%, whlie strength for tech and high-growth stocks helped the Nasdaq composite do better than the rest of the market. Treasury yields sank sharply again as traders continue to bet the Federal Reserve will have to cut rates later this year.

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

NEW YORK (AP) – Stocks are wobbling on Wall Street Thursday after a big show of strength in the morning vanished and worries continued to rise about the banking industry.

The S&P 500 was 0.5% higher in late trading after veering all the way from a 1.8% gain earlier in the day to a 0.4% loss. The Dow Jones Industrial Average was up 64 points, or 0.2%, at 32,094, as of 3 p.m. Eastern time, after giving up an early gain of 480 points. The Nasdaq composite was leading the market with a 1% gain.

Two big questions have been causing big swings for Wall Street this month, and investors still don’t have a final answer for either. On one, investors are worried about whether another bank will suffer a debilitating exodus of customers following the second- and third-largest U.S. bank failures in history. On the other, all the turmoil is clouding the outlook for what the Federal Reserve will do with interest rates after raising them to market-rattling heights over the last year.

“Until these two clouds get resolved, it’s hard to see the market making any sustained headway,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

“I do think it’s something where it could calm down on its own,” Ma said about the crisis pounding the banking industry, “and I hope that it does. But it’s not clear why that would happen” without more forceful action from the government.

A day earlier, stocks fell sharply after the Federal Reserve indicated that while the end may be near for its hikes to interest rates, it still doesn’t expect to cut rates this year. Fed Chair Jerome Powell also insisted the Fed could keep raising rates if inflation stays high.

Traders on Thursday nevertheless were still largely betting the Fed will cut rates later this year. Such cuts can act like steroids for markets, juicing prices for stocks, bonds and other investments. They would relax the pressure on the economy, but they could also give inflation more fuel.

Big technology and other high-growth stocks that tend to benefit the most from lower rates were among the strongest on Wall Street. Nvidia rose 2%, and Microsoft gained 1.9%.

Markets were also still mulling comments from Treasury Secretary Janet Yellen that may have dragged down bank stocks on Tuesday.

She said the government is not considering blanket protections for all customers at all banks. That may have disappointed some investors hoping for a more comprehensive solution. But Yellen did say the government will make all depositors whole at banks on a case-by-case basis, when failing to do so would mean risk for the broader system.

Implicit in that is perhaps the hint that any bank failure could be seen as such a systemic risk. Each of the last two big bank failures this month met that criteria. Depositors were promised all their money, even those with more than the $250,000 limit insured by the Federal Deposit Insurance Corp.

Bank stocks rose Thursday morning following their knee-jerk drop on Wednesday, but investors may still be needing to hear something more concrete, said Ma.

“The reality is that until there’s a belief that, at least in the near term, all deposits are protected, the economy remains at much greater risk than it needs to be,” he said

“If someone has deposits at” a bank seen as weak “and the stock is going down, why not pull your deposits, because we don’t know if those deposits will be guaranteed by the FDIC,” he said. “If any other prominent midsized banks go under and the deposits are not guaranteed, then all hell breaks loose.”

Stocks in the financial industry ended up being the heaviest weight on the S&P 500. First Republic Bank, which has been at the center of investors’ crosshairs the last couple weeks because of the industry’s crisis, fell 6%. It had been up nearly 10% in the morning.

The fear is that all the turmoil in the banking industry could cause a sharp pullback in lending to small and midsized businesses around the country. That could put more pressure on the economy, raising the risk for a recession that many economists already saw as likely.

The Fed’s Powell said such fears were part of the reason the central bank raised rates by only a quarter of a percentage point Wednesday instead of more. A pullback in lending could act almost like a rate hike on its own, he said.

The Fed has raised its key overnight rate to a range of 4.75% to 5%, up from virtually zero at the start of last year. Its policy makers indicated they might raise rates one more time this year before holding steady through the end of this year.

In markets abroad, stocks in London slipped 0.9% after the Bank of England also raised its key rate by a quarter of a percentage point. Stocks were mixed elsewhere across Europe and Asia.

On Wall Street, shares of Coinbase Global fell 15.1% after the cryptocurrency trading platform said it had been warned by the U.S. Securities and Exchange Commission that it could face charges of violating federal securities laws.

In the U.S. bond market, which has been home to some of Wall Street’s wildest moves this month, yields fell.

The yield on the two-year Treasury dropped to 3.78% from 3.97% late Wednesday. It was above 5% earlier this month.