Stocks were broadly higher in pre-market trading on March 21 on optimism that the banking crisis may be ending.
The Russell 2000, a broad market measure that includes many smaller companies, led the way with a 1.5% gain. The S&P 500 was up 0.8% and the Nasdaq was up 0.6%.
The hope is that the severe crisis may cause the Federal Reserve to pause interest rate hikes.
Why Are Stocks Up Today?
The banking crisis took out almost half the gains the market had seen since its September low and threatened to take out more. The Dow Jones 30 is off nearly 5% from a year ago.
It was the Federal Reserve’s move to hike interest rates to stem inflation, starting last year, that caused both the bear market and the banking crisis. Many banks now hold long-term bonds that are worth a fraction of what was paid for them. If depositors demand their money back, their capital would be exhausted. That’s just what happened to SVB Financial’s (NASDAQ:SIVB) Silicon Valley Bank.
The 30-year treasury bond peaked last October at 4.33% and, before the banking crisis in February, hit a low of 3.55%. It currently stands at 3.65%.
The Federal Reserve is still expected to hike rates by 0.25% on Wednesday. The current target rate is 4.5-4.75%. A hike would take the Federal Funds Rate, the price banks charge each other for loans, to 5%.
An “interest rate inversion,” where short-term rates are higher than long-term rates, is bearish for stocks. It increases the cost of money and encourages investors to buy risk-free government paper instead of lending it to the market.
But the banking crisis has thrown a wrench into the Fed’s inflation fight. While the real economy has continued to grow, the crisis is making banks reluctant to lend, which could cause a sharp recession later this year.
What Happens Next
A “soft landing” of the economic plane, with minimal disruption to growth while inflation abates, is everyone’s goal. If the Fed uses the banking crisis to pause its hikes, that may still be possible.
On the date of publication, Dana Blankenhorn held no positions in any companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
