Why Are Stocks Down Today?
Despite best efforts to keep the ball rolling in the right direction, the equities sector suffered a rough start for the Friday session. Specifically, all eyes focused on the free-falling price of regional financial institution First Republic …
Despite best efforts to keep the ball rolling in the right direction, the equities sector suffered a rough start for the Friday session. Specifically, all eyes focused on the free-falling price of regional financial institution First Republic Bank (NYSE:FRC). Despite emergency efforts to bolster the embattled bank, FRC slipped around 26%. Subsequently, fears about a banking contagion spreading throughout the global economy sparked a popular inquiry: Why are stocks down today?
At the epicenter of the crimson tide sits the rescue plan for First Republic. According to CNBC, FRC stock gained nearly 10% during the Thursday session. The boost stemmed from a group of banks — which include powerhouses like Bank of America (NYSE:BAC), Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM) — agreeing to contribute $30 billion in deposits. Naturally, this represented a clear signal to provide confidence in the banking ecosystem.
Further, the cash injection aligns with hedge-fund manager Michael Burry’s belief that the immediate response to recent bank failures should prevent a full-scale crisis. Citing the Panic of 1907, financier J.P. Morgan — after an initial bout of hesitation — quickly provided financial aid to troubled trust Knickerbocker to prevent a wider contagion.
Unfortunately, the dramatic decline of FRC on Friday understandably sparked the question, why are stocks down today? To understand the context of what’s happening to the regional bank, in the trailing month, FRC hemorrhaged 80% of value. Regarding lifetime returns, it’s down more than 8%. Therefore, investors have real concerns about a severe global impact as bank failures spread.
Why Are Stocks Down Today Despite Support?
Indeed, when market observers ask this question, it’s not just about First Republic. To be blunt, FRC may be just one domino in the banking value chain. Underlining the inquiry is understanding just how many more pieces may fall.
It’s a worrying circumstance because, to Burry’s point, the U.S. government acted swiftly to the recent bank implosions. According to a joint statement by the Treasury, Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), the U.S. will backstop depositors of the failed institutions. However, the federal government will not protect shareholders, which may have chilled bank stock investors.
In other words, at any moment, an investment could go to zero. Without protection or recourse, shareholders have little reason to expose themselves to questionable regional banks.
Logically, another component undergirding the inquiry focuses on the Fed. Invariably, the central bank will attract substantial attention as it ponders next steps regarding monetary policy. If it continues forward with tightening the money supply through interest rate hikes, more cogs in the wheel could break. Should that materialize, the Fed may have a global emergency on its hands.
On the other end, policymakers find themselves in a bind. Last year at the economic symposium at Jackson Hole, Wyoming, Fed Chair Jerome Powell stated in part that “[r]estoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.”
If Powell backs down now, the economy may struggle with heightened inflation. Either way, prospects don’t look encouraging.
Why It Matters
Presently, Europe is dealing with its own banking-related concerns. Although embattled Credit Suisse (NYSE:CS) grabbed a lifeline courtesy of a loan of up to 50 billion Swiss francs ($54 billion), CS stock struggled on Friday, losing about 7%.
Despite rising pressures, the European Central Bank increased interest rates by 50 basis points on Thursday. The prospect that the Fed too may stick to its monetary tightening policy likely contributed to the search phrase, why are stocks down today?
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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