NEW YORK (AP) — Stocks tumbled again on Wall Street Wednesday as concerns about the strength of banks on both sides of the Atlantic mount.
The S&P 500 was down 1.3% in afternoon trading as markets in Europe fell more as shares of Swiss Credit Suisse plummeted to a record low. The Dow Jones Industrial Average fell 461 points, or 1.4%, to 31,694 as of 11:15 a.m. Eastern Time, after previously dropping a whopping 639 points. The Nasdaq composite was down 0.9%.
Credit Suisse has been battling issues for years, including losses it suffered following the collapse of investment firm Archegos Capital in 2021. Its shares in Switzerland fell more than 16% after reports the top shareholder will stop pumping more money into its investment.
The bright spotlight of Wall Street has intensified in the banking sector lately amid concerns about what may happen next after the second and third largest bank failures in American history over the past week. Shares of US banks plunged again on Wednesday after a brief one-day break on Tuesday.
The heaviest losses were focused on smaller and medium-sized banks, which are believed to be more at risk of customers trying to raise their money en masse. Larger banks also fell, but not by as much.
First Republic Bank fell 16.9%, a day after rising 27%. Fifth Third Bancorp fell 5.8%. JPMorgan Chase fell 4.4%.
Much of the damage is seen as the result of the Federal Reserve’s fastest rate hikes in decades. The Fed has raised its key overnight interest rate to a range of 4.50% to 4.75%, up from near zero at the beginning of last year, in hopes of curbing painfully high inflation.
Higher rates can dampen inflation by slowing the economy, but they increase the risk of a later recession. They also negatively affect the prices of stocks, bonds and other investments. That last factor was one of the problems faced by Silicon Valley Bank, which collapsed Friday as high interest rates pushed down the value of its bond investments.
The US government announced late Sunday a plan to protect depositors at Silicon Valley Bank and Signature Bank, which regulators closed over the weekend in hopes of boosting confidence in the banking sector. But since then, markets have swung from fear to calm and back again.
There is still great uncertainty about the banking sector as it struggles to cope with last year’s blizzard of rate hikes after years of historically easy conditions. In his annual letter to investors, BlackRock CEO Larry Fink pointed to past eras of rising interest rates that led to “spectacular financial blowouts,” such as the years-long savings and credit crunch.
“We do not yet know whether the impact of easy money and regulatory changes will materialize in the US regional banking sector (similar to the S&L crisis) with more repossessions and closures on the way,” he wrote.
Some of this week’s wildest action has been in the bond market, with traders scrambling to guess what all the chaos will mean for future Fed action. On the one hand, stress in the financial system could prompt the Fed to postpone rate hikes again at next week’s meeting, or at least forego the larger rate hike it may have announced.
On the other hand, inflation is still high. While easing interest rates could give banks and the economy more breathing room, fears that such a move by the Fed could also give inflation a boost.
Weaker-than-expected economic reports released Wednesday may have allayed some of those concerns. They showed that inflation at the wholesale level slowed much more than economists had expected last month. It is still high at 4.6% year-on-year, but that was better than the 5.4% forecast.
Other data showed that US spending at retailers fell more than expected last month, although spending was revised upwards in previous months. Meanwhile, production in New York state is weakening much more than forecast. Such data may raise concerns about an impending recession, but it may also ease some pressure on inflation in the near term.
That caused yields on the two-year Treasury to plummet. It follows expectations for the Fed, falling from 4.25% at the end of Tuesday to 3.77%. That is a huge step for the bond market. The two-year interest rate was above 5% a week ago, the highest level since 2007.
The yield on the 10-year Treasury fell from 3.69% to 3.42%. It helps set rates for mortgages and other important loans.
The weak economic data has led traders to bet that the Fed will hold rates steady next week. That is a sharp reversal from earlier this month, when the only options seemed to be an increase of 0.25 percentage point or an acceleration to 0.50 percentage point.
In Europe, indices plummeted due to the weakness of banks. The French CAC 40 fell 3.2% and the German DAX lost 2.8%. The FTSE 100 in London fell 3.1%.
They tracked the gains in much of Asia.
On Wall Street, companies in the oil and gas industry also plummeted as the price of crude fell more than 3%. They led to a widespread tumble within the S&P 500, where 80% of stocks fell.
Halliburton fell 8.6% and Schlumberger fell 5.5%
AP Business Writers Joe McDonald and Matt Ott contributed.