In a widespread selloff driven by credit rating agency Moody’s downgrade of several lenders
all three major Wall Street indices concluded Tuesday in negative territory. Concerns about the health of U.S. banks and the overall economy were rekindled by these developments.
Five-month surge
Despite a five-month surge that brought the benchmark S&P 500 (.SPX) and Nasdaq Composite (.IXIC) to within 5% of their record highs, August has witnessed five out of six sessions ending with losses. The S&P has dipped 2% this month, with the Nasdaq experiencing a decline of 3.2%.
Moody’s decision to lower the ratings of 10 small- to mid-sized lenders by one notch and place six major banking entities, including Bank of New York Mellon (BK.N), U.S. Bancorp (USB.N), State Street (STT.N), and Truist Financial (TFC.N),
under review for potential downgrades, served as the catalyst for Tuesday’s downturn.
The credit agency
The credit agency also issued a warning that the sector’s credit strength would likely be tested by funding risks and diminished profitability. While market confidence in U.S. banks had been gradually recovering after this year’s collapses
of three lenders, including Silicon Valley Bank, this recent action exposed the fragility of investors’ trust in financial stocks.
In response, the S&P 500 Banks index (.SPXBK) declined by 1.1%, and the KBW Regional Banking index (.KRX) dropped by 1.4%. Prominent banks such as Goldman Sachs (GS.N), Bank of America (BAC.N), Bank of New York Mellon, and Truist all experienced declines ranging from 0.6% to 1.9%.
Chief of Investment Strategy
Jason Pride, Chief of Investment Strategy and Research at Glenmede
highlighted that Moody’s downgrades and the warning issued to larger banks indicate the agency’s
concerns about the banking system’s health and its broader impact on the economy. Pride emphasized the crucial role regional banks play in lubricating the economy through lending
noting that any slowdown in their activities could hinder economic function.
The repercussions of these bank downgrades were reflected in the CBOE Market Volatility index (.VIX)
commonly known as the fear gauge, which temporarily surged to a two-month high.
The Dow Jones Industrial Average (.DJI) experienced a decline of 158.64 points, or 0.45%, ending at 35,314.49. The S&P 500 (.SPX) lost 19.06 points, or 0.42%, closing at 4,499.38. Similarly, the Nasdaq Composite (.IXIC) dropped by 110.07 points, or 0.79%, reaching 13,884.32.
Among the major S&P 500 sectors, eight recorded declines. While financials (.SPSY) experienced a significant decrease, materials (.SPLRCM) and consumer discretionary (.SPLRCD) sectors also weighed heavily on the overall performance.
The energy (.SPNY) index
The energy (.SPNY) index initially faced a slump due to disappointing trade data from China, which impacted crude oil prices. However, it later rebounded by 0.5%, in tandem with rising oil prices following a positive economic outlook projected by a U.S. government agency.
Healthcare shares advanced, supported by Eli Lilly (LLY.N) surging by 14.9% to a record high due to positive quarterly profits. Globally, drugmakers also saw gains after Denmark-based Novo Nordisk (NOVOb.CO) announced its obesity drug
Wegovy, reduced the risk of heart disease.
Dish Network (DISH.O) experienced a 9.6% jump following its revelation of plans to merge with satellite communications vendor EchoStar (SATS.O), which also saw a 1% increase.
United Parcel Service (UPS.N) encountered a 0.9% decrease after the bellwether of the U.S. economy lowered its annual revenue forecast.
Trading volume on U.S. exchanges totaled 10.94 billion shares, aligning with the average over the last 20 trading days.
During this period, the S&P 500 reached 13 new 52-week highs and 17 new lows, while the Nasdaq Composite marked 46 new highs and 195 new lows.
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