The turmoil surrounding Silicon Valley Bank fueled Wall Street selling on Friday, adding to a slide that took place the previous day. A stronger-than-expected jobs report also contributed to the decline.
The tech-heavy Nasdaq Composite (COMP.IND) closed -1.8%, the S&P 500 (SP500) ended -1.4% and the Dow (DJI) finished -1.1%.
The Nasdaq concluded trading at 11,138.89, a slide of 199.47 points. The Dow Jones fell 345.22 points to close at 31,909.64, while the S&P 500 dropped 56.73 points to end at 3,861.59.
Like the day before, all 11 S&P sectors finished in the red. Real Estate was the worst performer, dropping by more than 3%. Materials experienced a retreat of more than 2%, while Financials, Industrials and Info Tech were notable contributors to the decline as well.
The financial sector was rattled by a liquidity crisis at SVB Financial’s (SIVB) Silicon Valley Bank, which was closed by U.S. regulators and taken over by the Federal Deposit Insurance Corp. This marked the biggest bank failure since the 2008 financial crisis.
In economic news, the government revealed that nonfarm payrolls rose 311K in February. This represented slower growth than the revised 504K seen in January, but the figure still came in above the 223K that economists had predicted.
With wage increases a key contributor to overall inflation, ongoing strength in the labor market could put pressure on the Federal Reserve to keep raising interest rates.
“Our take on the regular macro events is, nothing to see here. GDP and jobs look strong and we don’t see the Fed extinguishing the economy or risk assets,” Alex King of Cestrian Capital Research told Seeking Alpha. “The big question is whether the implosion of Silicon Valley Bank is a contained or contagious matter. Our guess is the former, given the high-risk nature of their customer base, but much will be revealed in the coming weeks we believe.”
King added: “For now the long term continues to look bullish to our eyes – some body blows may be struck in the near term however.”
Notwithstanding the jobs data, concerns about the banking sector caused many Wall Street experts to reassess the Fed’s willingness to threaten financial instability with further aggressive rate hikes. According to the CME’s FedWatch tool, the market is currently pricing in a 40% chance that the Fed will raise its key rate by 50 basis points at its next meeting, scheduled for later this month. A day before, that probability stood at 68%.
This in itself represented a massive shift from earlier in the week. Hawkish comments from Fed Chair Jerome Powell on Tuesday caused a jump in the perceived likelihood that a more-aggressive rate hike was on the way. Meanwhile, the market is still pricing in higher odds of a half-point increase than it was before the Fed chief spoke. A week ago, the FedWatch tool showed a 28% chance of a 50-basis-point increase.
Bond trading reflected the changing perception of the Fed’s likely path. Treasury yields saw a steep decline on Friday, adding to a slide seen the day before and further reversing sharp gains posted earlier in the week.
The 2-year yield (US2Y), which topped 5% earlier this week, plunged 30 basis points to 4.60%. The 10-year Treasury yield (US10Y) declined 22 basis points to reach 3.70%.
Among individual stocks, the SVB failure triggered declines among a host of bank stocks. First Republic Bank (FRC), Western Alliance Bancorporation (WAL) and Signature Bank (SBNY) all posted double-digit percentage declines. Outside of financials, Oracle (ORCL) slipped following its quarterly report, dragged down by revenue growth concerns.