Share prices on the New York Stock Exchange fell on Friday, ending a turbulent week amid investor fears that turmoil in the banking sector could drag the economy into recession.
The S&P 500 plunged 1.1%, paring its 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 were in turmoil this week as concern mounted over the second and third largest bank failures in US history. Just a day earlier, markets rallied with relief after Credit Suisse and First Republic Bank, two banks whose financial situation had made investors nervous, bolstered their cash reserves.
But on Friday some of the hope faded and they fell again. In Switzerland, Credit Suisse shares lost 8%. In Wall StreetFirst Republic shares sank almost 33%, bringing its weekly collapse to 71.8%.
The two banks face different problems, but the prevailing fear is that the banking system could be cracking under the weight of the fastest series of interest rate hikes in decades.
“If the Fed raises (rates) that high and fast, something is going to break,” said Ross Mayfield, an investment strategy analyst at Baird. “There is a very clear and evident story that this has happened, even in slower cycles and lower rate hikes.”
Analysts have been quick to say that the current bank turmoil doesn’t seem nearly as dire as the financial crisis of 2007-2008 that ruined the world economy. But the problems continue to fuel concerns that a recession could strike, because bank problems could mean it’s hard for smaller and medium-sized businesses to get the loans they need to grow.
In the past week, banks have borrowed nearly $165 billion from the Federal Reserve, an indication of the strain on the system.
After years of historically easy conditions, banks are being shaken after the Federal Reserve and other central banks raised interest rates at a dizzying pace, moves aimed at trying to control high global inflation.
A report released Friday gave the Fed one more reason not to accelerate rate hikes. Inflation expectations among US consumers are falling, according to a preliminary survey from the University of Michigan. That’s key for the central bank, which has said such expectations can fuel virtuous and vicious cycles.
However, in a more grim sign for the economy, confidence also fell. That data is at the heart of the most important part of the American economy: consumer spending.
Easing expectations about what the Fed will do has recently helped several big tech stocks. They have had their own problems, but tend to benefit from lower interest rates. Partly because of that, the S&P 500 still posted a 1.4% gain this week.
The yield on the two-year Treasury note fell from 4.17% to 3.81%.
In total, the S&P 500 fell 43.64 points on Friday to end at 3,916.64. The Dow lost 384.57 units, settling at 31,861.98, and the Nasdaq gave up 86.76 points, closing at 11,630.51.
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