Major stock indexes headed toward their worst day in more than a month on Tuesday as a slew of regional bank stocks continued to collapse following First Republic’s weekend failure—adding to investor unease ahead of a critical Federal Reserve meeting.
Despite trading close to flat Tuesday morning, the Dow Jones Industrial Average plunged deep into negative territory as the day progressed, falling 540 points, or 1.6%, to 33,514 by 11:40 a.m. ET, while the S&P 500 and tech-heavy Nasdaq slipped 1.7% and 1.4%, respectively.
A slew of regional bank stocks headed up the market plunge, with Pacwest Bancorp cratering 39%, Western Alliance 21% and Metropolitan Bank 19%—volatility that triggered multiple trading halts throughout the day and pushed the Regional Bank Sector ETF down to its lowest level since October 2020.
“The nature of this particular dive feels different than was the case in March [when Signature Bank abruptly collapsed and Silicon Valley Bank failed],” Vital Knowledge founder Adam Crisafulli wrote in a Tuesday email, explaining investors were at the time scrutinizing losses in bond portfolios, whereas they’re now anxious about the broader regional bank sector in general.
With funding costs rising and interest income past its peak, banks are more likely to face losses in the coming months—putting regional banks at a disadvantage given that investors fear many of them “are like stodgy brick-and-mortar retailers focused on selling non-perishable commodity products at the advent of the Amazon and online commerce era,” adds Crisafulli.
The fallout comes just one day after JPMorgan chief Jamie Dimon sought to quell concerns about the banking industry, saying the system is “very stable” but still warning: “You will see other cracks in the system.”
What To Watch For
The Fed is set to announce whether it will pause or continue its interest rate hikes at the conclusion of its policy meeting Wednesday afternoon. The futures market implies just a 19% chance the central bank will keep rates the same and an 81% chance it will again raise rates by 25 basis points, according to the CME FedWatch Tool. Over the past few weeks, the odds have largely grown in favor of another rate hike—only to slightly abate following First Republic’s weekend failure.
Despite sectors of the economy taking massive hits, the Fed’s job in taming inflation is far from over, and officials have acknowledged the difficult path ahead as they’ve continued their aggressive rate hikes. Annual inflation fell for a ninth straight month in March, but consumer prices still rose by 5% on a yearly basis—well above the Fed’s 2% target.
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