Silicon Valley Bank Collapse Jolts Stock Market - The New York Times

S&P 500

March 8

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The collapse of a small bank in California on Friday set off a wave of concern over the health of the banking sector, amplifying fears for the broader economy and sending global stock markets lower.

Silicon Valley Bank, a prominent bank for start-ups in Santa Clara, Calif., was put under the control of the Federal Deposit Insurance Corporation early Friday. The decision to close the bank followed whipsaw trading on Thursday that continued into Friday, after SVB said it needed to take immediate steps to shore up its finances amid a darkening environment for start-ups and other tech companies.

Though it’s a relatively small lender, SVB’s failure overshadowed an upbeat report on the labor market, upended expectations for the path of interest rates and entrenched concerns about the health of the economy.

The S&P 500 skidded 1.4 percent on Friday, ending the week down 4.5 percent — its worst week of the year. The decline was led by SVB’s banking peers like Western Alliance Bancorp, which plunged over 20 percent, and Signature Bank in New York, which fell by almost 23 percent.

The KBW bank index, which tracks the stocks of 24 major banks, was also lower, and after falling each day of the week ended with a loss of more than 15 percent. The largest Wall Street banks held up better on Friday, with the concern focused on a handful of smaller institutions.

“This should be contained, but it would be excessively optimistic to think these issues won’t weigh on investors’ minds for some time,” David Wagner, portfolio manager at Aptus Capital Advisors, said. “We cannot know for certain how this will play out and the magnitude of the potential domino effect.”

Treasury Secretary Janet L. Yellen, testifying before the House Ways and Means Committee on Friday, said she was monitoring the situation. “There are recent developments that concern a few banks that I’m monitoring very carefully,” she said. “When banks experience financial losses, it is and should be a matter of concern.”

Ahead of Friday’s drop, the outlook on Wall Street had already turned gloomy after the Federal Reserve’s chair, Jerome H. Powell, told lawmakers on Tuesday that the central bank might have to raise interest rates more than it expected, and possibly at a faster clip, as it tried to rein in inflation. Higher interest rates weigh on stock prices, and raise the risk the Fed’s actions may tip the economy into a recession.

Banks can be especially vulnerable to rising rates, which can cause the value of their investment assets to fall, as was the case with SVB. That can hurt their ability to raise money, especially when clients that are also struggling with the rising costs that come from higher rates are pulling their deposits out.

Friday’s jobs report for February assuaged those concerns somewhat. Investors homed in on slower wage growth and an increase in unemployment, in part because more people are coming back to the labor force, two data points that suggest the Fed’s effort to slow the economy and rein in inflation may be working.

Some analysts said Friday’s employment data would take the pressure off the Fed when it met this month, and bets in financial markets tilted back toward a smaller, quarter-point rate increase instead of a half-point raise, which had been favored earlier in the week.

“I think most would agree that won’t happen,” Kristina Hooper, chief global market strategist at Invesco, said of the possibility of a larger rate increase in March.

However, others were less hopeful that the latest data on the jobs market would stay the Fed’s hand. Ron Temple, chief market strategist at Lazard, said that beneath the headline numbers were signs that wages continued to rise for portions of the labor force and that robust hiring remained a cause for concern. The United States added over 300,000 new jobs in February, nearly 100,000 more than economists had predicted.

“It’s still a scorchingly hot pace of job creation,” Mr. Temple said.

Investors’ split views point to the potential deciding influence of next week’s reading on consumer price inflation for determining what the Fed is likely to do when it meets.

The yield on the two-year U.S. government bond, which is sensitive to changes in interest rate expectations, reflected the shifting narratives in financial markets. The yield rose above 5 percent on Tuesday for the first time since mid-2007 after Mr. Powell’s comments as investors began to bet on higher interest rates to come.

The move rapidly reversed course, however, as SVB’s collapse created concerns about the effects of higher interest rates on the economy and the positive news on the labor market tempered the need for further increases. The yield on the two-year bond ended the week at 4.58 percent.

“Interest rate hikes are slowing the economy, and that is weighing on the U.S. economy,” said Lauren Goodwin, an economist at New York Life Investments. “What is happening to the banking sector is indicative of what investors fear could happen to other parts of the economy if interest rates continue to go up.”

Alan Rappeport contributed reporting.

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