Stock prices traded lower into the weekend on Friday, with the Dow Jones Industrial Average down nearly 400 points (or 1.2%) and the Standard & Poor’s 500 Index down 1.1%, as worries about the banking sector weighed on sentiment once again. After the failure of Silicon Valley Bank in the prior week, banks borrowed a combined $165 billion from the Federal Reserve last week to shore up their liquidity.
First Republic Bank, whose stock lost approximately 70% last week, announced it was to receive $30 billion of deposits (financial support/lifeline) from a group of large U.S. banks. Despite the turmoil and uncertainty regarding banks, the major stock market averages held up well last week.
For the week in total: The Dow edged just .1% lower to 31,862, the S&P gained 1.4% to 3,917, while the NASDAQ Composite (benefitting from a drop in bond yields), led the way with its best week since January, jumping 4.4% to 11,631. Overall, trading and sentiment in both the bond and stock markets remain volatile and choppy, as investors try to gauge the state of the banking system and whether problems will spread or if the issues are contained.
Looking to the week ahead, we’ll hear from the biggest bank of them all, the central bank of the United States – the Federal Reserve. The Fed’s next policy move, scheduled to be announced Wednesday afternoon, has been and is still being widely and passionately debated. Currently, probabilities are approximately 73% the Fed will raise interest rates by ¼ percentage point, and 27% they will leave rates unchanged, according to the CME FedWatch Tool.
Before the banking problems surfaced, the debate was whether the Fed would raise rates by ½ point (or just ¼ percent). Those advocating for ¼ point increase argue that with inflation still running over 6%, the Fed should keep up the fight against rising prices. Advocates for a pause point out the banking problems will cause a contraction in credit, which is deflationary and acts like a rate increase. For our vote, we believe the Fed should pause (or at least indicate they are likely done tightening), but we think they will raise by the ¼ point.
Interestingly, whatever happens this week, expectations have once again shifted, with probabilities now indicating the Fed will cut rates later this year.
As always, please contact us with any questions or if you would like to set up a meeting.
All the best – Southport Station Financial Management, LLC