After a Wild Week, What Are Markets Saying About the World?
Stocks, bonds and commodities markets are all sending different signals. Although the S&P 500 rose this week, oil prices fell along with bond yields, signaling that investors are worried about the economy.
Daily close of the S&P 500
It was a week of market turmoil that began with the collapse of a small bank in the United States, spiraled into a panic about the global financial system and ended with a bold effort to stanch the cascading crisis that ultimately fell short.
And it was the clearest illustration yet of the dangerous side effects of campaigns by central banks to raise interest rates.
In the year since the Federal Reserve began pushing rates higher, in an effort to stamp out runaway inflation, investors have watched shares of speculative tech companies crash, emerging markets fall into default and the nascent cryptocurrency market crumple.
This week, it was the collapse of Silicon Valley Bank, a midsize bank that served start-ups and venture capital firms, that incited chaos in the markets and prompted fears of a financial crisis.
Stocks swung wildly day to day, oil prices slid to lows not seen in over a year and yields on government bonds suddenly reversed their march higher as investors began to wonder about the impact of the escalating crisis on the economy. The dust is yet to settle. Here’s a summary of what happened in markets this week, and what it tells us about investors’ views of the world going forward.
A crisis in small banks was provoked by a collapse in California.
Percent change in the stock price of four regional banks since the start of the year
The trouble began on March 8, when Silicon Valley Bank revealed steep losses on its portfolio of government bonds and mortgages, ostensibly safe investments that backed the bank’s deposits and that had taken a hit from rising interest rates. The bank’s shares plunged, depositors rushed to pull out their money and, within days, authorities seized control of the bank (as well as Signature Bank, based in New York), pledging to keep it open for business.
But in the markets, investors couldn’t shake the worry that other banks were facing similar problems, and that induced a panic regarding a number of small lenders, including First Republic Bank, PacWest and Western Alliance. The wave of selling in their shares appeared to subside on Thursday, after a group of rival lenders said they would bolster First Republic with $30 billion in deposits. Then on Friday, selling resumed, and First Republic dropped a further 20 percent.
The selling has left shares of the banks’ sharply lower than they were before the collapse of Silicon Valley Bank. First Republic has lost over 80 percent of its value since the start of the month, PacWest and Western Alliance roughly 60 percent.
The broader stock market seemed to look beyond this week’s turmoil.
The good news for most investors is that the S&P 500 was resilient to worries that centered on the banking industry, and after a big rally on Thursday, the index ended the week with a gain of 1.4 percent.
It shows that, to stock investors at least, the crisis in the banking sector appears mostly contained. It helped that policymakers in the United States and Europe stepped in to back their banks. Authorities guaranteed deposits at SVB and Signature, and in Europe, Credit Suisse said it would tap a $54 billion lifeline from the Swiss National Bank after investors there began to panic over its financial state — though for very different reasons than with SVB.
There are also some characteristics of the S&P 500 that can mask some of the pain under the surface. Insulated from the trouble in the regional banks, Microsoft, Alphabet and the chip-maker Nvidia all rose more than 10 percent this week. The sheer size of these big companies means their gains helped lift the whole index.
But investors in other markets are worried about the economy.
2-year Treasury yield
Perhaps the starkest evidence of a shifting view on the economy came in the market for government bonds. On Wednesday, the yield on two-year U.S. government notes, known as Treasuries, plummeted by a magnitude greater than Black Monday in October 1987, one of the worst market crashes on record.
The two-year yield is a barometer of changing expectations for interest rates, and it had been climbing fast as investors bet on further rate hikes from the Fed.
In early March, the yield had crossed above 5 percent for the first time since 2007. By Friday, the yield had tumbled to 3.85 percent — a huge swing by the bond market’s standards.
The signal from the markets was clear: The Fed is going to need to start cutting interest rates, instead of raising them, sooner than was thought — something it typically does only when the economy runs into trouble.
The benchmark U.S. price for a barrel of crude oil
It isn’t just the American economy that investors are worried about. A slide in commodity prices this week shows that they’re concerned about the global economy, too.
Crude oil prices are illustrative of this. After suffering its second sharpest fall of the year, on Wednesday, followed up by another sharp decline on Friday, a barrel of West Texas Intermediate crude is now at its lowest price since late 2021.
Demand for oil is global, making it a barometer for the health of the world’s economy. It often fluctuates with economic news from other parts of the world. When things are booming, oil demand is high, and oil prices typically rise. Such a sharp fall is a warning that investors fear demand will wane if the economy falters.
In other words, it may not be over yet.
Investors remain on tenterhooks about the potential for more damage to emerge — illustrated by the continued churn in bank stocks and bond yields.
Asked about the possible risks, some analysts point to other corners of the market susceptible to high interest rates, like the corporate debt market that ballooned after the 2008 financial crisis. The pain in the banking sector could also prompt lenders to pull back from new business, tightening access to a crucial source of cash should companies start to run into trouble — restrictions that could weigh on growth.
And, of course, a big fear for investors is that something has yet to be uncovered, like the trouble at a regional bank in Silicon Valley just over a week ago.