On Tuesday, Wall Street experienced a decline prompted by credit rating agency Moody’s downgrades of several lenders, renewing concerns about the stability of the U.S. banking sector and triggering a broader market sell-off.
Moody’s reduced ratings for 10 small- to mid-sized lenders by a single notch and placed six major banking entities, including Bank of New York Mellon, U.S. Bancorp, State Street, and Truist Financial, under review for potential downgrades.
The agency also cautioned that the banking sector’s credit strength could be strained by funding risks and decreased profitability.
Despite a gradual increase in market confidence in U.S. banks following the failures of three lenders earlier in the year, the downgrades revealed the vulnerability of investor confidence. The S&P 500 Banks index has recorded a 3.1% decline this year, in contrast to the benchmark S&P 500 index, which has risen by 16.8%.
During Tuesday’s trading, the banks index slid by 1.8%, while the KBW Regional Banking index dropped by 2%.
Prominent banks such as Goldman Sachs and Bank of America experienced declines of 3.1% and 2.6%, respectively. Bank of New York Mellon and U.S. Bancorp saw decreases of 1.9% and 0.4%.
Brandon Pizzurro, the director of public investments at Guidestone Capital Management, noted, “Anytime you see the backbone of the U.S. financial system being under watch, that gives people a lot to pause… Markets are slowly digesting that, maybe the U.S. financial system is not absolutely perfect and maybe we are going to have higher rates for a much longer period of time.”
In response to the bank downgrades, the CBOE Market Volatility index, known as Wall Street’s fear gauge, reached a two-month high.
After a challenging week where the S&P 500 and Nasdaq saw their worst performance since March, Wall Street had rebounded on Monday as investors positioned themselves ahead of the highly anticipated U.S. inflation report scheduled for Thursday.
Helping alleviate concerns over further monetary tightening, Philadelphia Fed President Patrick Harker suggested that, barring abrupt shifts in recent economic data, the U.S. Federal Reserve might be approaching a stage where it can maintain unchanged interest rates.
By 2:10 p.m. ET, the Dow Jones Industrial Average had declined by 267.12 points, equivalent to 0.75%, landing at 35,206.01; the S&P 500 experienced a loss of 35.84 points, or 0.79%, closing at 4,482.6; and the Nasdaq Composite fell by 157.90 points, representing a drop of 1.13%, reaching 13,836.50.
Among the major S&P 500 sectors, 10 registered declines. While financials understandably experienced significant drops, materials and technology sectors also contributed to the downward trend.
The energy index was among the worst performers early on, driven by falling crude prices after disappointing trade data from China. However, as oil prices turned positive in the afternoon, supported by an optimistic economic outlook projected by a U.S. government agency, some of the decline was mitigated.
Contrary to the broader trend, the healthcare sector gained by 0.3%.
Globally, pharmaceutical companies witnessed a rise in stock prices following Denmark-based Novo Nordisk’s announcement that its obesity drug, Wegovy, lowers the risk of heart disease.
Eli Lilly also surged by 13.3% to attain a record high after the pharmaceutical firm reported positive quarterly profits.
Dish Network jumped by 9.3% following its disclosure of plans to merge with satellite communications vendor EchoStar, which rose by 1.2%.
United Parcel Service experienced a 1% loss after the U.S. economic bellwether lowered its annual revenue forecast.
Pan Finance is a print journal and news website providing worldwide intelligence on finance, economics and global commerce. Known for our in-depth analysis and opinion pieces from esteemed academics and celebrated professionals; our readership consists of senior decision makers from across the globe.