Before the Fed’s Rate Decision, the Dow Drops More than 300 Points as Concerns about the Banking Sector Resurface

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Before the Fed’s Rate Decision, the Dow Drops More than 300 Points as Concerns about the Banking Sector Resurface
Stocks tumbled on Tuesday as traders’ fears around contagion in the regional banking sector returned ahead of the Federal Reserve’s rate decision.

Stocks tumbled on Tuesday as traders’ fears around contagion in the regional banking sector returned ahead of the Federal Reserve’s rate decision.

The Dow Jones Industrial Average fell 367.17 points, or 1.08%, to end at 33,684.53. The S&P 500 slid 1.16% and closed at 4,119.58. The Nasdaq Composite dropped 1.08%, ending the session at 12,080.51. The three major averages fell for a second consecutive session.

Bank shares slid, with the SPDR S&P Regional Banking ETF dropping more than 6%. Traders questioned the stability of smaller regional financial institutions after the crisis that engulfed Wall Street in March and brought about the end of Silicon Valley Bank and First Republic Bank. Regional banks PacWest and Western Alliance declined 27% and 15%, respectively.

Meanwhile, JPMorgan Chase’s shares shed 1.6%, giving back some of its gains from the previous session. A day earlier, JPMorgan shares rose after the takeover of embattled regional First Republic Bank. Other large banks including Goldman Sachs and Citigroup also dropped more than 2%. Bank of America fell 3%.

“We think that the concerns around the bank sector, combined with uneasiness regarding the debt ceiling – and most importantly, apprehension over the uncertain future Fed rate policy stance — are all contributing to this risk-off sentiment. So in an area like the bank sector that already was under stress, we’re also seeing greater unease because of these other contributing factors,” said Greg Bassuk, CEO of AXS Investments.

The Fed’s two-day policy meeting, which kicked off Tuesday, is expected to conclude with the central bank announcing another quarter-point rate hike on Wednesday. Per the CME Group’s FedWatch tool, traders are pricing in a roughly 85% chance of a rate hike. Investors will be looking for clues on whether the Fed will keep rates steady after this meeting, or if it will further tighten monetary policy to fight inflation.

Weighing on sentiment Tuesday was word from the U.S. Treasury that the country may hit the debt ceiling sooner than expected. Treasury Secretary Janet Yellen warned on Monday that the U.S. may run out of measures to pay its debts as early as June 1, earlier than the late July deadline Goldman was estimating.

“You have the perfect cocktail for a risk-off day,” said Art Hogan, chief market strategist at B. Riley Wealth Management. “It’s a typical risk-off day with three binary situations staring at us from the short-term horizon.”