Stocks finished higher despite a volatile week as banking worries continued and the Federal Reserve raised rates while providing updated projections.
The Fed
A month ago, it was all but certain that the Fed would raise rates as inflation readings came in higher than expected, the labor market continued its hot streak, and the January retail sales report unexpectedly surged.
These and other disappointing economic reports created the perfect argument for the Fed to continue higher. Fed Chair Jerome Powell underscored this in prepared remarks to the Senate Banking Committee just a little more than two weeks ago, saying that conditions were ripe for further tightening, as reports suggested the need for a higher terminal rate with a longer perch.
Powell went a step further and said that the Fed is prepared to raise rates faster if need be. This had investors speculating between a 25 or 50 basis point hike.
But, in the next 72 hours, two banks failed and a crisis unfolded.
This changed the conversation and investors debated whether the Fed would pause rates to see how things played out in the banking industry or if they would proceed with another quarter-point hike.
Ultimately, the Fed raised interest rates by a quarter point, which was the leading expectation. Powell spent much of Q&A time fielding questions on the banking industry, using the platform to try to reassure markets that the US banking system is “sound and resilient”.
Following the downfall of several banks, investors began to expect a sooner pivot to rate reductions. While that didn’t materialize in the Fed’s updated projections, the dot plot did suggest a lower terminal rate of 5.1% - which isn’t much higher than the current range of 4.75% and 5% as the Fed looks increasingly likely to wait and see from here. Importantly, Powell said that efforts by banks to shore up their balance sheets were likely to have similar effects to additional rate increases as they will tighten financial conditions.
Banking Update
Banks, particularly European banks, had a tough week as more banks joined the injury list.
We started the week off with UBS purchasing its long-time rival Credit Suisse for $3 billion. UBS assumed $5.4 billion in losses in the deal.
Meanwhile, First Republic Bank (FRC) was further downgraded into junk territory before JPMorgan (JPM) CEO Jamie Dimon helmed efforts to rescue the failing bank.
Friday, Deutsche Bank (DB) plunged after redeeming its tier 2 subordinated bonds early. Typically, buying back debt is seen as a positive, however, investors reacted the opposite as recent events stymied the efforts to grow confidence around the stock.
Block
Lastly, Block (SQ) came under fire after a short seller report by Hindenburg Research accused the company of inflating user metrics so insiders could cash out over $1 billion.
Hindenburg accused the company of inflating metrics with fake and duplicate accounts, enabling and embracing criminals, and making fraud easy, among other things. A former employee told Hindenburg that between 40% and 75% of accounts are fake.
Block, obviously, denies all accusations and said it will take legal action.
In the last several years Hindenburg has levied short-seller reports against Adani, Nikola, and DraftKings.
All told, stocks notched a gain this week. The S&P 500 rose 1.39%, the Dow advanced 1.18%, and the Nasdaq jumped 1.66%.
