Stocks tumbled on Tuesday as traders' fears around contagion in the regional banking sector returned ahead of the Federal Reserve's rate decision.
The Dow Jones Industrial Average fell 367.17 points, or 1.08%, to end at 33,684.53. The S&P 500 slid 1.16% and closed at 4,119.58. The Nasdaq Composite dropped 1.08%, ending the session at 12,080.51. The three major averages fell for a second consecutive session.
Bank shares slid, with the SPDR S&P Regional Banking ETF dropping more than 6%. Traders questioned the stability of smaller regional financial institutions after the crisis that engulfed Wall Street in March and brought about the end of Silicon Valley Bank and First Republic Bank. Regional banks PacWest and Western Alliance declined 27% and 15%, respectively.
Meanwhile, JPMorgan Chase's shares shed 1.6%, giving back some of its gains from the previous session. A day earlier, JPMorgan shares rose after the takeover of embattled regional First Republic Bank. Other large banks including Goldman Sachs and Citigroup also dropped more than 2%. Bank of America fell 3%.
"We think that the concerns around the bank sector, combined with uneasiness regarding the debt ceiling — and most importantly, apprehension over the uncertain future Fed rate policy stance — are all contributing to this risk-off sentiment. So in an area like the bank sector that already was under stress, we're also seeing greater unease because of these other contributing factors," said Greg Bassuk, CEO of AXS Investments.
The Fed's two-day policy meeting, which kicked off Tuesday, is expected to conclude with the central bank announcing another quarter-point rate hike on Wednesday. Per the CME Group's FedWatch tool, traders are pricing in a roughly 85% chance of a rate hike. Investors will be looking for clues on whether the Fed will keep rates steady after this meeting, or if it will further tighten monetary policy to fight inflation.
Weighing on sentiment Tuesday was word from the U.S. Treasury that the country may hit the debt ceiling sooner than expected. Treasury Secretary Janet Yellen warned on Monday that the U.S. may run out of measures to pay its debts as early as June 1, earlier than the late July deadline Goldman was estimating.
"You have the perfect cocktail for a risk-off day," said Art Hogan, chief market strategist at B. Riley Wealth Management. "It's a typical risk-off day with three binary situations staring at us from the short-term horizon."
U.S. stocks end Tuesday's trading session in the red
U.S. stocks closed lower Tuesday.
The Dow Jones Industrial Average dropped 367 points, or 1.08%. The S&P 500 and the Nasdaq Composite also ended Tuesday's trading session on losses, declining 1.16% and 0.89%, respectively.
— Hakyung Kim
Fed Chairman Powell 'taking a page out of Volcker's playbook,' according to The Wealth Alliance's CEO
An interest rate hike by the Federal Reserve tomorrow won't come as much of a surprise to markets — but what investors will be paying attention to is the likelihood of more rate increases later this year, says The Wealth Alliance's CEO and managing director Rob Conzo.
"I don't think the interest rate hike is any great news and won't really affect anything. What everyone's listening to here is Powell's speech about how long [we'll have] these rate hikes? Or how long he's going to keep an elevated interest rate environment, or when he may see interest rate pullbacks," Conzo said.
However, Conzo believes the Fed Chairman will offer little clue for the markets as to the central bank's intentions for its monetary policy tightening path.
"I believe Powell is not going to speak to that. He's going to do what Powell has been doing," Conzo added. "His words that he used in past minutes were, 'we're going to keep at it.' That happened to be the name of Paul Volcker's autobiography: 'Keeping At It.' Jerome Powell is literally taking a page out of Paul Volcker's playbook."
— Hakyung Kim
WTI Crude Oil settles at lowest levels since March
WTI Crude settled down 5.29% at $71.66, marking its lowest settle since Mar. 24, when it settled at $69.26. WTI Crude has declined 10.7% in 2023.
Brent crude and natural gas also settled lower, falling 5.03% and 4.49%, respectively. Brent crude has shed 12.33% year to date, closing at $75.32 on Tuesday. Meanwhile, natural gas has tumbled more than 50% in 2023.
— Hakyung Kim
Barclays downgrades several retail stocks
Barclays lowered its rating on a host of retails stocks, citing a pullback on spending among consumers across all income levels.
"Our bottom-up approach to analyze promotions across the retail landscape, regardless of category and target income bracket, suggests that retailers are struggling to drive traffic, conversion, and sales, despite markedly cleaner inventory levels," the firm said in a Tuesday note.
CNBC Pro subscribers can read more about the downgrades here.
— Hakyung Kim
'March returns in May,' says Goldman Sachs
Goldman Sachs says investors haven't fully moved past March's bank crisis as banking stocks trade lower on Tuesday. The firm's analysts noted that following the failures of Silicon Valley Bank and Signature Bank in March, the market's worries were quickly alleviated by a deposit injection at First Republic Bank.
"Since bottoming out at 3808 on Mar. 13, the S&P 5000 gained almost 10% [as of] Monday night on the back of relaxed banks tensions, as well as a strong earnings season (so far) and a growing consensus that the Fed will soon pause its year-long rate hiking cycle," several Goldman analysts wrote in a Tuesday note.
"But today, we appear to be seeing some return of the March concerns following JPM's announced acquisition of FRC Monday. Regional bank stocks are down 4% to 13%. [Managing director Richard] Ramsden sees the JPM acquisition as accretive and points out that the transaction highlights that G-SIBs will be allowed to bid on FDIC transactions even if they are above the deposit cap," the note continued.
— Hakyung Kim
CNBC Pro: Buy these cheap, defensive stocks as long as recession fears keep mounting, UBS says
As recession fears keep flaring up again on Wall Street, investors can find safety in cheap, dependable, defensive stocks, according to UBS.
Given recent softness in economic data, the bank says cyclical stocks that benefit from high inflation have further downside ahead. Instead, the UBS playbook advises investors to stick to defensive stocks that remain cheap, such as in the telecom and healthcare industry groups.
"In prior bear markets around recessions, cyclicals have underperformed defensives by 22% from peak to trough," UBS' associate strategist Sean Simonds said in a note last week.
CNBC Pro subscribers can read on for stock picks here.
— Sarah Min
Selloff in Chegg shares could be a sign of losers of A.I. to come
The latest tumult for the education technology stock kicked off Monday evening after management highlighted how ChatGPT is hindering its growth.
While Chegg may be the first shoe to drop, it's certainly not the last company set to showcase some of the risks posed by AI.
CNBC Pro subscribers can read more about sectors at risk from AI here.
— Hakyung Kim, Samantha Subin
Mentions of weak demand hit record levels this earnings, according to Bank of America
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Securities, said that "mentions of weak demand soared to record levels" so far this earnings season.
Subramanian noted that mentions of tepid demand this round of earnings announcements is even higher than during the Covid-19 pandemic and Great Financial Crisis.
To be sure, the strategist said that corporate optimism "remains above average" and corporate sentiment remains "surprisingly strong." She added that despite concerns around tightening credit conditions, the bank's Corporate Sentiment score based on Natural Language Processing (NLP) analysis remains flat year over year, well off its 2Q22 lows. The score's year-over-year performance improved for the first time since the final quarter of 2021, "point[ing] to a potential earnings recovery."
— Hakyung Kim, Robert Hum
The Federal Reserve is in a 'safer position' now than it was a year ago, according to the Washington Center for Equitable Growth
Looking beyond the next few months, the Federal Reserve can afford to pursue a more patient strategy, according to the Washington Center for Equitable Growth's director of Macroeconomic Policy, Michael Madowitz.
"Looking beyond the next few months, the Fed is in a much safer position than it was a year ago—the economy is growing, and Fed funds rates are near the 5% benchmark, which gives the Fed enough room to cut when the next U.S. recession comes along. Arguably, the main reason we got high inflation coming out of this recession was the Fed could not risk hiking rates too early because it didn't have the breathing room it does now," Madowitz said in a Tuesday note.
He added that market-based breakeven inflation rates "suggest there is little threat to the Fed's credibility," giving the central bank room to relax its aggressive tightening policy path it began in March 2022.
— Hakyung Kim
Stocks making the biggest midday moves
These are some of the stocks making the biggest midday moves:
- Uber — Shares of the ride-hailing giant jumped more than 8% after the company reported first-quarter revenue that beat analysts' expectations. Revenue for the quarter was up 29% year over year. CEO Dara Khosrowshahi said Uber is off to a "strong start" for the year.
- Chegg — The education technology company plummeted more than 48% after the company said ChatGPT was hurting its growth. Chegg beat analyst expectations for the first-quarter, while offering underwhelming current-quarter guidance.
- Icahn Enterprises — Carl Icahn's conglomerate saw its shares fall more than 16% after notable short seller Hindenburg Research took a short position against the company, alleging "inflated" asset valuations, among other reasons.
— Alex Harring
Energy and financial stocks are Tuesday's biggest laggers
Energy and financial stocks are Tuesday's biggest underperformers, as all sectors