Stocks rose Friday after a volatile trading session. Although Friday began with fears that the banking crisis was spilling over to Deutsche Bank, the markets rebounded to end the week on a higher note.
The Dow Jones Industrial Average gained 132.28 points, or 0.41%, on Friday, closing at 32,237.53. The S&P 500 rose 0.56%, while Nasdaq Composite ticked up 0.3%. The major indexes all had a winning week, with the Dow gaining 1.2% week-to-date, while the S&P 500 and Nasdaq climbed 1.4% and 1.7%, respectively.
One factor that helped the market was a bounce back in regional bank stocks. The sector rallied on Friday, with the SPDR S&P Regional Banking ETF gaining 3.01% during the trading session. Amid all the volatility, the KRE ended the week up 0.18%.
A selloff of Deutsche Bank's U.S.-listed shares Friday morning put downward pressure on market sentiment and the major indexes, before the bank recovered some of its earlier losses. Deutsche Bank closed 3.11% lower Friday, rebounding from a 7% drop earlier in the trading session.
A selloff of shares was triggered after the German lender's credit default swaps jumped, but without an apparent catalyst. The move appeared to raise concerns once again over the health of the European banking industry. Earlier this month, Swiss regulators forced a UBS acquisition of rival Credit Suisse. Deutsche Bank shares traded off their worst levels of the session, which caused major U.S. indexes to also cut their losses.
"I think that the market overall is neither frightened nor optimistic — it's simply confused," said George Ball, president at Sanders Morris Harris. "The price action for the last month-and-a-half, including today, is a jumble without any direction or conviction."
European Central Bank President Christine Lagarde tried to ease concerns, saying euro zone banks are resilient with strong capital and liquidity positions. Lagarde said the ECB could provide liquidity if needed.
Investors continued to assess the Fed's latest policy move announced this week. The central bank hiked rates by a quarter-point. However, it also hinted that its rate-hiking campaign may be ending soon. Meanwhile, Fed Chair Jerome Powell noted that credit conditions have tightened, which could put pressure on the economy.
On Thursday, Treasury Secretary Janet Yellen said regulators are prepared to take more action if needed to stabilize U.S. banks. Her comments are the latest among regulators attempting to buoy confidence in the U.S. banking system in the wake of the Silicon Valley Bank and Signature Bank closures.
Ball said that Deutsche Bank is "very sound financially," noting that the market was "overreacting" in wake of the earlier bank failures.
"[Deutsche] could be crippled if there's a big loss of confidence and there's a run on the bank. There is, however, no fundamental reason why that should occur, other than nervousness."
CORRECTION: This blog has been updated to show that the major indexes all had a winning week, with the Dow gaining 1.2% week-to-date, while the S&P 500 and Nasdaq climbed 1.4% and 1.7%, respectively.
Investor's concerns about credit markets after the collapse of Silicon Valley Bank does not appear to haves fully spread to high yield debt just yet.
The iShares iBoxx High Yield Corporate Bond ETF (HYG) has attracted nearly $800 million in inflows over the past week, according to FactSet. Meanwhile, the SPDR Bloomberg High Yield Bond ETF (JNK) has pulled in $381 million.
The inflows have come even as credit spreads have widened, suggesting that there are some investors who are willing to take on the credit risk for higher yields.
— Jesse Pound
Baird is looking toward mortgage-back securities as it becomes more bearish on the economy.
"We take the view that a recession is coming, and we think that what's happening in the banking sector increases the odds of recession this year," wrote analyst Ross Mayfield and head of fixed income research Tom Titzouris.
"We'd gone underweight MBS in anticipation that banks would pull away from supporting the market this year, and that's exactly what's happened. As the banking sector has become stressed, they've moved away from activity in the MBS market and spreads have widened out. So, we're seeing some value begin to emerge there," said Mayfield and Titzouris.
"The offset to that underweight in mortgages is our overweight in Investment-Grade (IG) corporate ... Before the cycle matures, spreads will likely widen out and Treasury yields push lower because recession is going to be on everybody's radar as 2023 progresses," they added.
— Hakyung Kim
First the banks started to break in February, then it was the real estate investment trusts (which "have now accelerated lower particularly in the office space"), and now it's the turn of insurance, railroad and airline stocks, BTIG chief market technician Jonathan Krinsky wrote in a note to clients dated Thursday.
Krinsky highlighted four insurance stocks that are sitting at or near 52-week lows (Metlife, Chubb, AIG, Prudential) and said the KBW Nasdaq Insurance Index (KIX) is down about 16% from its February highs.
Meanwhile, for adherents of the Dow Theory, Krinsky noted that railroad stocks were "less than 1% away from their October lows" while airline stocks "are threatening a multi-month breakdown."
Technology is holding up the market , so "if tech fails, as we expect, then [the S&P 500] can quickly unravel lower."
— Scott Schnipper, Michael Bloom
Third Bridge analyst Omar Fahmy says that community and regional banks across the U.S. are headed toward a capital hoarding era as net interest margins tighten.
"Our experts say we're entering a period of capital hoarding for many community and regional banks as institutions compete for deposits and look to pull back on lending," Fahmy wrote in a Friday note.
"On average, we anticipate widespread NIM compression amongst regional banks followed by heightened efforts to improve their capital efficiency ratios."
The analyst added that he warns investors "to avoid a situation where commercial property owners opt for foreclosure, regional banks will have to start considering widespread loan modifications."
"While loan modifications to commercial real estate debt would relieve short-term pressure on banks and landlords, this would trigger their classification as Troubled Debt Restructuring. This would increase the risk rating of the loan and force banks to hold more risk-adjusted capital that could otherwise be lent," said Fahmy.
— Hakyung Kim
Asset price uncertainty is causing chaos the current chaos in the markets, according to Simplify Asset Management's chief strategist Michael Green.
"I think the biggest thing that's been kicked off here is this dynamic asset price uncertainty, which we haven't seen for a while," said Green.
"A higher cost of capital for financial institutions, in turn, means that many projects, loans or many other components that would have historically been financed, are now suddenly under scrutiny. So that is broadly what I would argue is transpiring. Europe is likely to get hit worse with this than the United States," Green said.
The strategist added that Europe is more dependent upon bank lending compared to unstructured markets than the U.S., in addition to lower overall growth opportunities that make it more vulnerable to volatility.
Green is bearish on his outlook and anticipates more volatility throughout the markets.
"My view has been for a while the Fed is being too aggressive in its rate hikes ... And now we're kind of trapped in what I would describe as a no win environment," he said. "Money is leaving the banking system, [and we're] almost certain to see a credit contraction, particularly in areas in which smaller banks and regional banks play a larger role, in getting l credit cards and things like auto loans and commercial real estate," Green added.
"So if anything, it leaves me much more bearish and would suggest that we'e likely in the early stages of a catch up in other forms of volatility, whether that is foreign exchange or equity volatility, or credit spreads, to what we're seeing in interest rate volatility."
— Hakyung Kim
Here are some of the names making the biggest moves midday:
GameStop -- The famed meme stock gained 2.5% in midday trading. The stock has been active since it reported its first profitable quarter in two years earlier this week.
Deutsche Bank — The German lender's U.S.-listed shares slid 5%, bouncing off its lows. The bank stock had been down about 14% after the bank's credit default swaps jumped without an apparent catalyst. JPMorgan defended Deutsche Bank Friday, saying investors should focus on the European bank's "solid" fundamentals.
Regeneron — Regeneron gained 2.2% after Jefferies upgraded the pharmaceutical stock to a buy from hold rating and said its Dupixent drug, in development with Sanofi, could serve as the next big catalyst for the company.
To see more companies making moves during midday trading, read the full story here.
— Brian Evans
The next danger spot for the U.S. financial sector could be commercial real estate, according to Bank of America's Michael Hartnett.
"CRE widely seen as next shoe to drop as lending standards for CRE loans to tighten further," said the bank's investment strategist.
The last Federal Reserve Senior Loan Office Opinion Survey, in January, noted "significant net shares of banks" that reported tightening lending standards for commercial loans. At the same time, the survey noted "weaker demand for loans from firms of all sizes."
This, combined with the Federal Reserve continuing to raise rates, is dangerous as banks undergo a stressful period.
— Jeff Cox
St. Louis Federal Reserve President James Bullard thinks that the central bank can successfully reign in banking sector turmoil while also taming inflation.
Bullard added to earlier comments from Friday discussing the health of the US banking system, and said that the current disruption is less concerning compared to the economic shocks of the Great Financial Crisis in 2008.
"Financial stress can be harrowing but also tends to reduce the level of interest rates," Bullard said. "Lower rates, in turn, tend to be a bullish factor for the macroeconomy."
And because Treasury yields have pulled back in recent weeks, Bullard said that could "help to mitigate some of the negative macroeconomic fallout that might otherwise occur in the aftermath of a period of financial stress."
Indeed, Bullard said, price pressures remain too high for the central bank to be comfortable with. He added that the Federal Reserve has the necessary tools at its disposal to properly address the banking crisis.
— Brian Evans
Deutsche Bank's U.S.-listed shares slid 4.3% during midday trading, pulling off their lows. The bank stock earlier dropped 14% after the German lender's credit default swaps jumped, without an apparent catalyst.
Investor concerns over the health of the European banking industry eased somewhat after European Central Bank President Christine Lagarde said euro zone banks are resilient with strong capital and liquidity positions. Lagarde said the ECB could provide liquidity if needed.
Meanwhile, JPMorgan defended Deutsche Bank, saying Friday that investors should focus on the European bank's "solid" fundamentals.
— Sarah Min
The tech-focused NYSE FANG index is up over 33% quarter-to-date. The index is now on track for its best quarter since the second quarter of 2020, when it gained 37.5%.
Companies leading the rally include NVIDIA, which is up over 83.5%. Meta is another top gainer, gaining 71%. Meta is headed toward its best quarter since the third quarter of 2013, when it gained 101.89%.
— Hakyung Kim, Gina Francolla
Credit Suisse says investors should consider putting their money in one exchange operator poised to capitalize on volatile market conditions.
"We believe continued transactional growth, improved investor sentiment for defense and elevated Data and Access solutions growth can expand the firm's valuation in 2023," wrote Analyst Gautam, who named the stock the bank's top exchange sector pick.
Read more on the call from Credit Suisse here.
— Samantha Subin
Ark Invest's Cathie Wood doubled down on Jack Dorsey's Block Thursday as the payment company sold off amid a short seller's criticism.
Block dropped nearly 15% Thursday after Hindenburg Research announced a short position, alleging that the company's flagship Cash App facilitates crime and lacks strong compliance controls.
Wood snapped up 275,544 shares of Block for her flagship ARK Innovation ETF Thursday, as well as 45,013 shares for ARK Next Generation Internet ETF and another 17,515 shares for Ark Fintech Innovation ETF, according to Ark Invest's daily trade updates. Those purchases, combined, were worth nearly $21 million, based on Block's Thursday closing price of $61.88.
— Yun Li
Dangers are rising that the problems in the banking industry could spread through the broader economy, according to Moody's Investors Service.
The ratings agency said regulators and policymakers "acted swiftly" to address stresses that ensued from several bank failures and reports of problems with others. While Moody's said it generally expects the response to control the liquidity and funding issues, it said that isn't assured.
"In an uncertain economic environment and with investor confidence remaining fragile, there is a risk that policymakers will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector," Atsi Sheth, managing director of credit strategy, and others said in a report.
"The longer that financial conditions remain tight, the greater the risk that stresses spread beyond the banking sector, unleashing greater financial and economic damage than we anticipated in our baseline," they added.
The analysts said the "spillovers" would occur through exposure to troubled banks, heightened risk aversion and policy mistakes.
—Jeff Cox
DoubleLine Capital CEO Jeffrey Gundlach said the Treasury yield curve, which is rapidly becoming less inverted, is flashing "red alert recession signals."
He also said the Federal Reserve will be cutting rates substantially soon, even though Chairman Jerome Powell stressed Wednesday that rate cuts are not in the central bank's base case
— Yun Li
Shares of some real estate companies and investment trusts were under pressure again on Friday, as concerns about tighter credit are surfacing for in the commercial office space.
Shares of SL Green Realty dropped more than 3%, while CBRE Group shed nearly 3%. Simon Property Group, which invests largely in retail space, was down more than 1%.
One notable commercial real estate stock bucking the trend was Realty Income, rising nearly 1% and helping to keep sector ETFs like the Vanguard Real Estate Index Fund (VNQ) roughly flat.
— Jesse Pound
St. Louis Federal Reserve President James Bullard said Friday that central bank policy should help contain cracks in the financial system.
"Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation," Bullard said in a presentation.
His comments were similar to sentiments Wednesday from Fed Chairman Jerome Powell, who said interest rate hikes are targeted at inflation while special lending facilities will keep banks liquid.
Bullard called the Fed's actions to the banking problems "swift and appropriate." He also noted that even with the financial tumult, economic data has been stronger than expected and said inflation has "declined recently."
Presentation materials released with Bullard's speech did not indicate a position on where rates should go from here. Markets are pricing in a strong possibility the Fed will not hike when it meets again in May. Bullard is a nonvoting member of the rate-setting Federal Open Market Committee.
—Jeff Cox
Despite seeing only a modest advance in Friday's session, gold is up 1.4% so far this week. If gold finishes Friday's session above its weekly flatline, it will mark the metal's fourth straight winning week.
— Alex Harring, Gina Francolla
Stocks opened lower Friday as a plunge in shares of Deutsche Bank in Europe raised investor fears about the banking sector once again.
The Dow Jones Industrial Average slid 178 points, or 0.55%. S&P 500 dipped 0.48%, while Nasdaq Composite was 0.22% lower.
— Sarah Min
Jefferies says it's time to buy Regeneron after results from a recent study showed that its Dupixent drug could potentially treat chronic obstructive pulmonary disease.
Analyst Akash Tewari upgraded the company to buy from hold, saying that use cases for COPD could create a $4 billion opportunity for Regeneron.
Read more on the call from Jefferies here.
— Samantha Subin
Demand for long-lasting goods such as appliances, TVs and computers fell more than expected in February, the Commerce Department reported Friday.
Durable goods orders declined 1% for the month, more than the Dow Jones estimate for a 0.3% decline though less than the 5% plunge in January.
Excluding transportation, new orders were unchanged, while orders less defense fell 0.5%.
Stock market futures held losses following the 8:30 a.m. ET data release.
—Jeff Cox