Well, it was a nice 24 hours we had there, thinking the banking crisis might be kinda-sorta wrapping up. Wall Street had other ideas.
Here's the deal: On Tuesday, investors woke up feeling a bit less sanguine about the health of the financial system than they had a day earlier. Regional bank stocks got hammered, led by PacWest Bancorp and Western Alliance Bancorp — both of which were halted several times for volatility. The SPDR S&P Regional Banking ETF, which tracks a range of mid-size banks, dropped about 7%.
Large banks weren't immune from the turmoil: Shares of JPMorgan Chase slid 1.6%, Citigroup fell 2.6% and Wells Fargo declined 3.8%.
The Dow, S&P 500 the Nasdaq Composite all fell more than 1%.
Why did the markets suddenly get all worked up again?
In short: The all-important Fed meeting is tomorrow; the April jobs report is due Friday; the government may default in a month; and, of course, no one's all that confident that banks are in the clear.
The banking crisis
The selloff that began in early March isn't over just because Jamie Dimon, the CEO of JPMorgan Chase, says it should be. (ICYMI: After scooping up First Republic from the bargain bin Monday, Dimon told investors "this part of the crisis is over." Not so fast, Jamie...)
Everyone's basically wondering which regional bank is going to be the next to stumble. Investors are eyeing banks with profiles similar to SVB, Signature and First Republic — regional, coastal, heavy on uninsured deposits.
They're also fretting because the actions that set the banking crisis in motion — rapid interest rate hikes by the Fed — are still percolating through the financial system.
Tuesday's selloff also reflects some general anxiety about macroeconomic news on the horizon.
Parsing Powell
Tomorrow, all eyes will be on Fed Chair Jay Powell when he announces the central bank's latest policy decision. He's widely expected to say that the Fed is raising the benchmark rate by another quarter of a point (aka 25 basis points) — its 10th hike since March last year.
That much is priced in. But what investors will be looking for is any sign, explicit or implicit, that the Fed board is going to hit pause.
"I'm hoping that they sit around today and look at each other and say, 'we can't do this,' " Daniel Alpert, Managing Partner of Westwood Capital, told me. "I think they feel committed to this last 25 basis points, but I think the message he should deliver tomorrow is: 'Higher for longer' just to make the hawks happy. And basically, 'we see this as the last for a while.'"
Jobs report While the labor market has been historically strong even as the Fed has raised borrowing costs for businesses, the March jobs report showed signs of cooling. Whether that's a blip or the start of a trend has huge consequences for the economy. A slight cooldown could be an encouraging sign for the Fed, which is trying to balance inflation and employment. Too tepid, and the central bank may decide it needs to do more to slow the economy. (A sudden freeze, while virtually impossible right now, would obviously be bad news, too.)
The debt ceiling
Anxiety is also building on Wall Street about the risk of the US defaulting on its debt — a situation that, while unprecedented, is widely assumed to be an economic and financial disaster.
Treasury Secretary Janet Yellen issued a stark warning yesterday that the US government could run out of money to pay its debts as soon as June 1. Though it's a moving target. And we all know how much Wall Street loves uncertainty and the prospect of financial doom...
"There's a great fear that this generation of legislators are more irresponsible, more polarized and more willing to do damage than any previous generation," Justin Wolfers, a professor of economics and public policy at the University of Michigan, told my colleague Zachary B. Wolf. "I will tell you that I am more worried than I've ever been in my career, at this moment, about the sky actually falling."
Bottom line: Three major banks have failed in the span of two months, felled by a panic that lenders are having a tough time shrugging off. Meanwhile, the economy is a tricky transition phase that may only be resolved with a recession, and Congress — the folks who could move to stem panic by assuring voters and investors alike that there are adults at the wheel — is playing chicken with the world's largest economy.
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