Justin Sullivan/Getty Images
The implosion of SVB makes for scary headlines, but it could actually be great for the stock market.
That’s because the event could trigger a reversal of the primary cause of the stock market’s pain in 2022: rate hikes.
Interest rates plunged on Monday, and expectations are growing that the Fed will pause its aggressive hikes.
The implosions of Silicon Valley Bank, Silvergate Capital, and Signature Bank in recent days might make for scary headlines. But they could actually be bullish developments for stock investors.
That’s because the Federal Reserve may be forced to slow the pace of rate hikes it’s been enacting since March 2022. It would be welcome news for investors who have felt the pain of tighter financial conditions as stocks have limped to a weak start this year.
It would also help alleviate the very pressure that led to the collapse of these institutions. After all, the rising-interest-rate environment is what put the firms in such a precarious situation to begin with, as risk-free government bonds started yielding more than their debt. Customers pulled money and fled to greener pastures, and the panicked situation eventually snowballed into a series of bank runs.
Now, with the prospect of further rate hikes diminished, investors are scrambling to reassess what it means for two main drivers of stock gains: corporate earnings growth and risk appetite. Based on Monday’s market action, it’s positive: all three US indexes rose, with the more rate-sensitive Nasdaq pacing the gains with a 1.4% increase.
A number of Wall Street firms have already forecasted a pause in rate hikes, Goldman Sachs chief among them.
“In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March,” the firm’s chief global economist Jan Hatzius said in a note to clients.
That’s a big deal. Just last week stocks sold off as Fed Chairman Jerome Powell presented a hawkish stance to Congress, leading the market to expect a 50-basis-point hike next week, followed by at least a couple more later in the year.
Now some are seeing the fragility in the regional banking sector, and market expectations have started to lean towards something previously unthinkable: rate cuts later this year. That would be rocket fuel for stocks.
A reversal in a key market dynamic
Fast-rising interest rates throughout 2022 dinged company valuations …read more
Source:: Business Insider