A choppy day of trading on Wall Street ended with stocks mostly higher Monday, as battered banks showed more strength, at least for now.
The S&P 500 eked out a 0.2% gain after having been up by as much as 0.8%. Banks and energy stocks led the gainers in the benchmark index, outweighing losses in technology and communications companies.
The Dow Jones Industrial Average rose 0.6%, while the Nasdaq composite fell 0.5%, reflecting losses in Google parent Alphabet and other tech companies. Gainers outnumbered decliners on the New York Stock Exchange by nearly 3-1.
The S&P and Nasdaq are coming off two straight weekly gains, even as markets have been in turmoil following the second- and third-largest U.S. bank failures in history earlier this month. Investors have been hunting for which banks could be next to fall as the system creaks under the pressure of much higher interest rates.
Still, financial stocks were among the biggest gainers Monday. First Citizens ' stock soared 53.7% after it said it would buy most of Silicon Valley Bank, whose failure sparked the industry’s furor earlier this month. As part of the deal, the Federal Deposit Insurance Corp. agreed to share some of the losses that may arise from some of the loans First Citizens is buying.
Other banks that investors have highlighted as the next potential victims of a debilitating exodus of customers also strengthened.
First Republic Bank jumped 11.8% and PacWest Bancorp rose 3.5%. Most of the focus in the U.S. has been on banks that are below the size of those that are seen as “too big to fail.”
A broader worry has been that all the weakness for banks could cause a pullback in lending to small and midsized businesses across the country. That in turn could lead to less hiring, less growth and a higher risk of a recession. Many economists were already expecting an economic downturn before all the struggles for banks.
“Unfortunately this is what happens when you tighten policy that quickly,” Amanda Agati, chief investment officer of PNC Asset Management Group, said about the past year's swift rise in interest rates. “Things break in the system. Some of the weakest links are starting to show up.”
The worries are international. In Europe, Credit Suisse’s stock tumbled so quickly this month that regulators brokered its takeover by rival Swiss banking giant UBS. At the end of last week, the market’s sights set on Deutsche Bank, whose stock fell sharply as analysts questioned why it had come under pressure.
“So far, regulators and lawmakers have worked together to keep the crisis under control, and they have used all the help they could to do so,” Naeem Aslam of Zaye Capital Markets said in a commentary. “This particular element is keeping the hope alive that whatever the issue was with Deutsche Bank, lawmakers are going to address it, as there is simply too much to lose if things are left alone.”
On Monday, Deutsche Bank shares rose 6.1% in Germany. Other big banks across Europe also found some stability. These giant banks don’t share many characteristics with the smaller and mid-sized banks in the United States that have been under pressure. But all are navigating much more scrutiny from investors broadly. Their world has become much more difficult because interest rates have jumped very high very quickly.
The Federal Reserve and other central banks announced their latest increases to interest rates in recent weeks as they fight inflation that’s still gripping worldwide. Higher rates can undercut inflation by slowing the economy, but they raise the risk of a recession. They also hurt prices for stocks, bonds and other investments.
The Fed has pulled its key overnight rate to a range of 4.75% to 5%, up from virtually zero at the start of last year. It indicated last week that the troubles in the banking system could end up acting like rate hikes on their own, by slowing lending.
The managing director of the International Monetary Fund, Kristalina Georgieva, told a conference in Beijing on Sunday that risks to financial stability have risen as interest rates climbed. She said actions by central banks and other regulators have helped to ease strains on markets, “but uncertainty is high, which underscores the need for vigilance.”
The Fed has hinted it may raise rates just one more time this year before leaving them alone for a while. Traders on Wall Street, though, don’t believe it. Many are betting the central bank will have to cut rates as soon as this summer to prop up the economy.
Such hopes for rate cuts have helped stocks recently despite all the bank turmoil. But they could also be setting the market up for disappointment.
PNC's Agati said she believes the Fed and doesn't expect a rate cut imminently. Even if one were to arrive, it would likely be a signal of a much worse economy, which itself would be bad for stocks. She’s expecting profits to fall this year for companies amid a mild recession, which means she sees stocks potentially falling 10% to 15%.
“We’re just not there,” she said. “Either the market is completely delusional or the market is already looking past" a possible recession based on “how benign it is compared with the pandemic or financial crisis” of 2008. “In either case, I think the market is delusional to think of it that way.”
Huge, quick swings in expectations for the Fed have caused historic-sized moves in the bond market.
Yields jumped Monday in their latest lunge. The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, rose to 3.53% from 3.37% late Friday. It was above 4% earlier this month.
Lower rates can act like steroids for stocks, and technology and other high-growth stocks tend to get a particularly big boost. That has helped the S&P 500, which is dominated by such Big Tech stocks as Apple and Microsoft.
Other areas of the market that don’t benefit from such Big Tech stocks have been weaker. The Russell 2000 index of smaller stocks, for example, is on track for a 7.6% loss this month versus a 0.2% gain for the S&P 500.
The Russell outgained the broader market Monday, however. The index rose 18.75 points, or 1.1%, to 1,753.67.
Elsewhere on Wall Street, the S&P 500 rose 6.54 points to 3,977.53. The Dow added 194.55 points to 32,432.08, and the Nasdaq fell 55.12 points to 11,768.84.
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AP Business Writers Elaine Kurtenbach and Matt Ott contributed to this report.