On Monday, stocks took in stride news of the latest bank failure thanks to a quick takeover of First Republic Bank by JPMorgan Chase (JPM, -1.6%). But today, with the Fed on the cusp of another interest rate hike, investors fretted that more chaos could be in store for the beaten-down banking industry, which sent markets into a tailspin.
The Federal Reserve is widely expected to announce a 25 basis point (0.25%) rate hike when it concludes its two-day policy meeting tomorrow. This will be the 10th straight rate hike the central bank has issued since March 2021, which will bring its terminal rate to a range of 5.00%-5.25% – its highest level since 2006.
With the First Republic failure still fresh on everyone's minds, David Nicholas, portfolio manager of XFUNDS and founder and CEO of investment and planning firm Nicholas Wealth Management, believes more banks could be at risk if the Fed lifts rates higher from here.
"The First Republic bank failure and takeover is another direct result of the Federal Reserve's extreme tightening policy of the past year," Nicholas says. "As interest rates rose dramatically, the value of mortgage loans held on First Republic's balance sheet showed sizable losses." This, he adds, caused "panicked" depositors to begin withdrawing funds, which turned into "a full-blown liquidity crunch."
Not helping matters was a dire warning from Treasury Secretary Janet Yellen, who said late Monday that the U.S. could default on its financial obligations as soon as June 1 if the government doesn't raise the debt ceiling.
Meanwhile, the latest Job Openings and Labor Turnover Survey (JOLTS) showed job openings fell to 9.6 million in March. While openings are still unusually elevated from a historical perspective, it marks the lowest number of available positions since April 2021. Layoffs hit their highest level since December 2020, and the quits rate fell to 2.5% from February's 2.6%.
"Risk appetite did not stand a chance as traders focused on lingering doubts over the regional banks, rising recession odds, and growing risks that the U.S. could default on its debt next month, says Edward Moya, senior market strategist at currency data provider OANDA.
How stocks finished today
Ten of the 11 sectors closed lower today, led by declines in financial (-2.3%) and energy stocks (-4.3%). Regional bank stocks in particular suffered outsized losses, with PacWest Bancorp (PACW, -27.8%) and Western Alliance (WAL, -15.1%) – both of which were halted in intraday trading – being two of the biggest decliners.
As for the major indexes, the Dow Jones Industrial Average slid 1.1% to 33,684, the S&P 500 fell 1.2% to 4,119, and the Nasdaq Composite slumped 1.1% to 12,080.
Investors should focus on defensive stocks
There's a lot of anxiety among market participants right now. In addition to chaos in the banking industry and debt ceiling worries, folks are also wondering if the Fed's efforts to tame inflation will lead to recession.
"This sets the stage for continued choppy trading over the near term as macro uncertainty remains high approaching the second half of the year," says Dan Wantrobski, technical strategist and associate director of research at Janney Montgomery Scott.
Investors can prepare for this potential volatility by targeting defensive stocks. These could include the best dividend stocks, which can help offset unexpected market declines with steady and reliable income. Not sure where to start? How about checking out the best Warren Buffett dividend stocks? These seven top dividend payers are expected to produce impressive returns for the Berkshire Hathaway equity portfolio.
