This week has been all about the banking industry, so it seems fitting that a key driver of the market Friday was news that a beaten-down bank suspended its dividend.
This was the latest sign of instability in the embattled financial sector – and follows the failures of several U.S. regional lenders, including Silicon Valley Bank. As a result, nervous investors took risk off the table ahead of the weekend.
Despite Thursday's news that First National Bank (FRC) took efforts to shore up its liquidity, including taking in $30 billion of uninsured deposits from several of the country's big banks, FRC stock plunged 33.0% after the company said it is suspending its dividend. Meanwhile, SVB Financial Group (SIVB) – parent company of Silicon Valley Bank – said that it filed for Chapter 11 bankruptcy protection.
"The breakdown in the banking sector quickly shifted investor concerns from higher-for-longer monetary policy to rising recession risk, which has been well-telegraphed by a sharp drop in Treasury yields and a significant downgrade of the terminal rate in the fed funds futures market," says Adam Turnquist, chief technical strategist for LPL Financial. Indeed, market expectations are for one more 0.25% rate hike at the next Fed meeting, and then a pause.
On the economic front, the University of Michigan's consumer sentiment index fell to 63.4 in March from February's reading of 67.0. This marked the first decline in four months for the index, and the majority of the consumer interviews occurred "prior to the failure of Silicon Valley Bank," the report indicated.
Today's selling was widespread, with all 11 sectors finishing in the red. Financials (-3.3%) suffered the worst, followed by real estate (-2.3%) and industrials (-1.7%). Energy (-1.7%) was another big decliner as U.S. crude futures slumped 2.4% to $66.40 per barrel. For the week, crude futures fell 14%, the biggest weekly decline since June.
"Oil is selling off amid the broader turmoil on Wall Street this week, as investors worry about possible bank failures," writes Jim Patterson, managing editor for The Kiplinger Letter. Banks may be "liquidating positions in commodities like oil futures contracts to make sure they have ample cash on hand" or the disruption is increasing expectations for a recession, "which would be bad for future oil consumption," Patterson adds.
As for the major indexes, the Nasdaq Composite shed 0.7% to 11,630, the S&P 500 dropped 1.1% to 3,916, and the Dow Jones Industrial Average fell 1.2% to 31,861. Still, the Nasdaq and S&P 500 ended higher on the week.
Stocks with the highest dividend yields
This week's market action resulted in a pair of mini crashes within two different sectors: financials and energy, says Jeff Bierman, chief market technician at TheoTrade. "There's been a catalytic effect behind Credit Suisse, SVB, and First Republic," Bierman says. "These regional banks put the financial system at risk and the market automatically extrapolated a hard-landing recession." As a result, money managers sold out of financial and oil stocks, the technician adds.
While this certainly increases anxiety for investors, it also creates opportunity, though Bierman says the best stocks to buy come from high-quality companies with steady cash flow and dividends. This could include focusing on the best dividend growth stocks and stocks with the highest dividend yields to ensure your portfolio has staying power.
