Stocks Climb Ahead of Fed Meeting

The following is a round-up of today's market activity:

• The S&P 500 Index was up 51.3 (1.3%) at 4002.87, its highest close since March 6; the Dow Jones industrial average was up 316.02 (1.0%) at 32,560.60; the Nasdaq Composite was up 184.57 (1.6%) at 11,869.11, the highest close since February 15.
• The 10-year Treasury yield was up about 12 basis points at 3.594%.
• Cboe's Volatility Index was down 2.74 at 21.41.

Energy companies also performed strongly Wednesday as crude oil prices rebounded from a recent slump, while consumer discretionary and communications services stocks were also up. Consumer staples and real estate were among the weaker sectors. Treasury yields jumped, with the 2-year note rising back above 4%.

Financial system stress

The S&P 500^® Index and other benchmarks have rallied sharply from a steep slump triggered by the March 10 failure of Silicon Valley Bank (SVB), which, combined with other bank shutdowns, raised the specter of a financial crisis that could imperil global banks.

Measures of market volatility expectations, such as the VIX, have pulled back from recent highs, suggesting markets have calmed somewhat. However, uncertainty remains over the stability of the global banking system, inflation, and the Fed's next moves—including the prospect of rate cuts should the economy sink into recession, if it hasn't already. A hike Wednesday would be the Fed's ninth in the past year, a historically rapid and severe tightening cycle.

"Remember, the Fed isn't dealing with just the financial sector troubles," says Kevin Gordon, a senior investment strategist at Schwab. "It has never before had to deal with the current mix of high inflation and a very tight labor market."

The recent bank failures "will accelerate the tightening of lending standards that was already happening, which could effectively decrease the amount of capital circulating in the financial system," Kevin adds. "The odds of a recession have moved up substantially given we now have the credit crunch component that was missing before. Lending conditions were already getting tight before SVB, but now with other banks pulling back, there will be a tougher feedback loop of tighter lending, less spending, less revenue, and weaker employment."

Existing home sales top expectations

The economic and corporate calendar is relatively light this week, though housing numbers released Tuesday illustrated the impact of higher interest rates.

Sales of existing homes, including single-family homes, townhomes, and condominiums, surged 14.5% in February from January, the National Association of Realtors reported. However, sales were down 22.6% from a year ago. Seasonally adjusted, the annualized sales pace dropped to 4.58 million units from 5.92 million units a year ago. The steep decline in sales activity was likely driven by the large increase of mortgage rates over the past year.

© Charles Schwab

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