All three major indexes on Wall Street finished lower on Thursday after news that PacWest Bancorp was considering “strategic options” reignited fears about the health of the U.S. banking sector.
The Dow Jones Industrial Average closed at 33,127.74, falling by 0.86 percent or 286.50 points. The tech-leaning Nasdaq Composite finished at 11,966.40, losing 0.49 percent or 58.93 points. Meanwhile, the S&P 500 concluded the trading session at 4,061.22, declining by 0.72 percent or 29.53 points.
Nine of 11 S&P 500 sectors plunged, with the financial sector falling by 1.29 percent and the communication services losing 1.26 percent. The CBOE volatility index, the U.S. stock market’s fear gauge, gained 21 points during the day. The KBW Regional Banking index also closed 3.5 percent lower.
Shares of PacWest plummeted 50.62 percent to $3.17 after the Los Angeles-based lender confirmed that a potential sale was included in its consideration. PacWest, however, affirmed that it did not experience unusual deposit outflows since the sale of regional lender First Republic to JPMorgan Chase on Monday.
The decline in PacWest shares triggered sell-offs in other bank shares. Western Alliance stock fell by 38.45 percent to $18.20, with trading halted multiple times during the session due to the sharp drop. The Phoenix-based lender denied a report suggesting it was also exploring a potential sale.
Dallas-based lender Comerica and Salt Lake City’s Zions Bancorporation lost 12.28 percent and 12.05 percent, respectively. First Horizon also plunged 33.16 percent after Canada’s Toronto-Dominion Bank called off its $13.4 billion purchase of the U.S. regional lender.
“Regional banks and tightening credit conditions are weighing on the market as investors try to recalibrate on where we are in terms of credit cycles and bank lending standards, and when a potential recession may hit.”
Zhe Shen, TIFF managing director of diversifying strategies
Larger U.S. banks also experienced the impact of the turmoil. JPMorgan shares fell by 1.4 percent, while Wells Fargo lost 4.25 percent.
Shares of Apple tumbled 0.99 percent to $165.79 ahead of the publication of its quarterly results. The company reported revenue of $94.84 billion for the second quarter, higher than the earlier estimates of $92.96 billion.
Qualcomm saw a 5.54 percent decline to $106.58 after the chipmaker’s projection for the third-quarter earnings missed estimates, while media conglomerate Paramount lost 28.35 percent after missing first-quarter earnings estimates due to declining advertising in its TV business.
On the other hand, Moderna shares rose by 3.2 percent after it reported higher-than-expected sales of the COVID-19 vaccine in the first quarter of the year.
Banking turmoil may push Fed to pause rate hike
The recent banking turmoil may drive the U.S. Federal Reserve to pause its monetary tightening campaign soon, say analysts.
After increasing the benchmark rate by 25 basis points on Wednesday, the central bank signals that a rate hike pause was likely. Officials plan to monitor incoming economic data, including the job report on Friday and the consumer price index next week.
Some investors have warned that the banking crisis is not over, saying that regional lenders are at risk of closing their doors due to liquidity issues. Several banks reported significant deposit outflows in the first quarter, particularly after the collapse of Silicon Valley Bank and Signature Bank in March.
Analysts say the banking turmoil will further reduce credit availability in the U.S. since banks will scale up their lending requirements, resulting in declining economic growth. Some experts have said a recession will happen in the U.S. within this year.