Stocks slid on Friday to cap a hectic week of trading that ultimately saw the Nasdaq Composite (^IXIC) rise more than 4%, the S&P 500 (^GSPC) gain about 1.5%, and the Dow Jones Industrial Average (^DJI) lose 0.2%.
Perhaps not exactly the weekly returns some investors would have expected in the wake of three U.S. banks failing.
On Friday, stocks fell across the board, with financial stocks at the center of selling pressure the day after a consortium of 11 big U.S. banks banded together to deposit $30 billion into First Republic (FRC) in a bid to stabilize the banking system.
When the closing bell rang Friday, the S&P 500 was off 1.1%, the Dow down 1.2%, and the Nasdaq lower by 0.7%. The small cap Russell 2000 took the day's biggest losses, falling more than 2.5% as the index's weight toward regional banks — which stands at about 16% — put the index under heavier pressure than its larger peers.
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The bulk of Friday's selling pressure came in the financial sector, with shares of First Republic falling 33% after getting a lifeline from its larger industry peers on Thursday.
Regional banks continued to face the most pressure, with the SPDR S&P Regional Banking ETF (KRE) falling 6% on Friday.
Major money center banks like JPMorgan (JPM), Wells Fargo (WFC), and Bank of America (BAC) all fell more than 3% on Friday. Over the last month, shares of Wells Fargo and Bank of America have lost more than 20%; the KRE regional banking ETF has lost closer to 30% over that period.
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Stocks rallied sharply on Thursday after news broke big banks led by JPMorgan and Bank of America were set to infuse First Republic with capital in what amounted to an industry bailout of the struggling bank.
The firms eventually announced their deal to backstop First Republic about a half hour before the market close. Speaking with Yahoo Finance Live on Thursday, longtime banking analyst Dick Bove said following these moves the near-term banking crisis is "over." Friday's market action suggested concerns from investors remain into the weekend over the longer-run prospects of these firms.
After opening lower on Friday, investors reacted positively to the day's biggest economic data point — the preliminary read on consumer sentiment from the University of Michigan — which showed inflation expectations falling to the lowest level since April 2021.
The report also noted its survey was 85% complete at the time of Silicon Valley Bank's failure, meaning initial reactions to that event from consumers won't roll in until later this month.
First Republic Bank headquarters is seen on March 16, 2023 in San Francisco, California, United States. (Photo by Tayfun Coskun/Anadolu Agency via Getty Images) ·Anadolu Agency via Getty Images
Investors were also tracking the price of crude oil, with WTI crude down losing more than 3.1% to settle at $66.19 a barrel, a roughly 15-month low as oil prices have come under heavy pressure in the last week amid supply concerns and worries about a global economic slowdown.
A rally in the dollar and gold this week spurred by investors seeking safe havens amid banking system worries also pressured oil prices.
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The Treasury market also remained a source of investor stress with the 10-year yield settling just under 3.4% on Friday, a precipitous drop from the 4% level seen just last week.
In a note to clients on Thursday, analysts at Bespoke Investment Group highlighted how some of the recent volatility in the Treasury market — in particular with shorter-dated Treasuries that tend to be more sensitive to Fed expectations — has likely come from "forced (that is, non-discretionary) buying and selling, and the prices that price-insensitive buyers or sellers agree to are not necessarily incorporating all information available."
"Another example is the massive inflow of cash to money market funds this week reported by ICI: total fund assets rose by 2.5% or $121bn, and money funds are forced to put that cash to work adding to short-term interest rate buying pressure," the firm wrote. "Collapsing bill yields and very high volatility are consistent with the idea that the money fund flows are forcing purchases in specific markets."
In a note to clients on Friday, Thomas Mathews, senior markets economist at Capital Economics, echoed this view, noting the front-end of the Treasury curve now implies the Fed's benchmark interest rate ending 2023 about 2 percentage points below where investors expected just a week ago.
"There's a good chance, in our view, that investors are now underestimating how much central bankers will raise rates over the next couple of months," Mathews wrote. "As such, we suspect the rally in short-dated bonds could go into reverse."
The Fed will announce its next policy decision on Wednesday, March 22, with investors pricing in a roughly 60% chance the central bank raises rates by another 0.25%, according to data from the CME Group.
Friday's close also marked a reshuffle in some sectors of the S&P 500, with S&P reclassifying 14 stocks in the index into new sectors as of today's close.
The most notable names on the move include Target (TGT), Dollar General (DG), and Dollar Tree (DLTR), which will move from the Consumer Discretionary (XLY) sector to Consumer Staples (XLP). Other notable companies moving sectors include Visa (V), Mastercard (MA), and PayPal (PYPL), which will move from Technology (XLK) into Financials (XLF).
