Markets: News  

By Joy Wiltermuth and Joseph Adinolfi

Regional bank shares take a breather from June rally

U.S. stocks closed higher on Thursday, lifting the S&P 500 index out of a long bear market, as investors in richly-valued technology companies attempted to shake off worries about the outlook for interest rates ahead of next week's Federal Reserve policy meeting.

What happened

On Wednesday, the Nasdaq shed 172 points, or 1.29%, its biggest daily drop since April 25, when the index fell roughly 2%, according to FactSet data. The pullback has put the tech-heavy index on track to snap a six-week winning streak.

What drove markets

Stocks climbed Thursday, with the Nasdaq bouncing back and the S&P 500 emerging from a long slump in bear-market territory, after weekly data on jobless claims showed claims jumped to a 21-month high of 261,000, an increase of 28,000 from the prior week.

"The S&P 500 hit that magic number, and takes us out of the bear market," said Peter Cardillo, chief market economist at Spartan Capital Securities, in a phone interview. "The hope is the Fed is going to skip raising rates next week."

Updates on the labor market and inflation continue to be front-and-center ahead of the Federal Reserve's coming June 13-14 meeting, where a skip, or pause, on raising interest rates is widely expected to allow the Fed's earlier rate increases more time to slow the economy.

"We believe inflation will continue to moderate but remain above 3% through year-end, and unemployment will trend higher to a still reasonable 4.5%," said Asawari Sathe, a Vanguard senior economist, in a client note. "In that scenario, the Fed cutting its policy rate this year is unlikely."

The jobless claims data tempered some concerns about the potential impact on growth stocks if the Federal Reserve keeps borrowing costs higher for longer. The S&P 500's information technology sector gained 1.2% Thursday.

The Nasdaq fell Wednesday after a surprise interest rate hike by the Bank of Canada. The index was still up 26.5% on the year, and logged its highest closing level since April 2022 earlier in the week. The BOC hike helped re-focus investors on the outlook for Fed policy. It came after the Reserve Bank of Australia on Tuesday delivered a second rate hike after ending a pause of its own.

See:Why U.S. stock-market investors were rattled by the Bank of Canada's surprise rate hike

"Right now, the market feels reasonably comfortable that the expectation is for the Fed to stay put where it is for interest rates and not raise rates again," said Yung-Ma, BMO Wealth Management's chief investment strategist, in a client note. "We think that's the most likely scenario. We think a lot of the interest rate increases that already happened have yet to really play out through the economy."

Away from the big three equity indexes, the Russell 2000 , a gauge of small-cap stocks, pulled back on Thursday, but was still on pace for big weekly gains.

Recent strength in small caps has signaled that the U.S. market might be on the verge of a "sea change," said Sam Stovall, chief investment strategist at CFRA, in a phone interview with MarketWatch.

"Investors are being encouraged by what has been going on in the market since the beginning of June," Stovall said. "We've been seeing a broadening of participation in the rally with small caps and value stocks joining in."

"Small caps have led the way on a month-to-date basis as well," he added.

Hard-hit regional bank stocks like those included in the SPDR S&P Regional Banking ETF (KRE) have been a key contributor to this trend as confidence has returned to the U.S. banking sector after three banks failed in March. The ETF was trading lower on Thursday, but was up 13.2% on the month-to-date.

"There have been indications that some of these regional banks are looking to sell off some of their commercial real-estate loan portfolios, which have been troubling people and causing concern about them staying on their balance sheets," Ma at BMO wrote.

Hopes that the Fed will refrain from raising interest rates again next week also helped lift bank stocks as investors bet that the Treasury yield curve could flatten, said JJ Kinahan, chief executive of IG North America, owner of brokerage firm tastytrade, in a phone interview.

The yield on the 2-year Treasury note has been higher than that of the 10-year Treasury note for more than 230 trading sessions, the longest stretch since the early 1980s, according to FactSet data.

Markets show investors pricing in a 68% probability the Fed will leave interest rates unchanged at a range of 5% to 5.25% on June 14. However, the chances of an additional 25 basis point rate increase in July has risen to 53%, up from just 10% a month ago, according to the CME's FedWatch tool.

Investors will receive an update on the pace of consumer-price inflation in the form of the consumer-price index for May, which is set to be released on June 12, when the Fed's two-day policy meeting begins.

Companies in focus

--Additional reporting by Jamie Chisholm

-Joy Wiltermuth

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June 08, 2023 17:21 ET (21:21 GMT)

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