Stock Market Rebounds After SVB Collapse Overted

U.S. stocks ended sharply higher in volatile trade on Tuesday, rebounding from their steep losses in the aftermath of the failure of Silicon Valley Bank, as investors digested February inflation data which matched estimates and suggested pressure on prices may be easing.

On Tuesday, investors drew comfort from indicators that a possible financial crisis was controlled, and they wagered on a more favorable climate for the economy moving ahead. This alleviated some of the concerns that had been plaguing Wall Street.

The performance of heavyweights like Microsoft and Apple, which have a greater influence on the overall performance of the broader index due to their size, contributed to the S&P 500's gain of 1.7 percent, which was lifted by a recovery in some bank stocks and bolstered by gains for heavyweights like Microsoft and Apple. On Tuesday, increases were seen for over three-quarters of the companies that comprised the index.

After a significant drop, it is not uncommon for stock prices to recover as investors attempt to predict how the market will function after the moment of stress has passed. Yet, the rise in the market was a welcome relief for investors who have been hammered by a quickly changing economic background that has led to whipsaw movements across both the stock market and the bond market.

One narrative that is beginning to take form as the mainstream one is that the crisis in the banking sector may lead to more favorable conditions for markets. The damage from the failure of Silicon Valley Bank and Signature Bank looks to be confined. The event may also give the Federal Reserve a reason to refrain from making any more hikes to interest rates. As higher interest rates resulted in increased business expenses and were the primary cause of the strain experienced by the banking industry, a slower pace of rate hikes might facilitate a recovery in the stock market.

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New inflation statistics released on Tuesday suggested just enough of a slowdown to bolster the argument for the Federal Reserve to be more cautious. Inflation was seen to have slowed marginally for the year through February, according to statistics from the Consumer Price Index that was issued before trading started. This was even though inflation had accelerated from the previous month.

The index of consumer prices for February came in substantially in line with predictions. The annual percentage change in the cost of living was reported to be 6%, a decrease from the 6.4% reported one month before. If we take away the cost of both food and energy, the core CPI figure rose 5.5% year over year. This is a slight decrease from the 5.6% increase recorded in January. The headline statistic of 6% represents a new low not seen since September 2021.

After a brief flirtation with the possibility of no change, investors' bets on whether or not the Fed will raise interest rates when it meets next week have shifted back to expecting a quarter-point increase. Despite this shift, investors' expectations remain significantly lower than where they stood one week ago. A week ago, investors anticipated that the central bank would increase interest rates to approximately 5.5 percent. Now, investors expect that the central bank will raise interest rates to a top of around 4.9 percent. This suggests an expectation of one more quarter-point rise in the coming days, which is a decrease from the previous week's projection of as many as four such increases.

The S&P 500 index remains within — though now towards the bottom of — the 3,800 to 4,200 range it has occupied for approximately four months, supported by hopes that a consequently less hawkish Federal Reserve will ameliorate the banking angst. The range has been occupied for approximately four months.

There is a chance that the February numbers and the interest rate pressures that banks face may convince the Federal Reserve to cease rate hikes entirely. Several market participants are divided on the issue, with some believing that a 25 basis point increase is the most likely conclusion.

According to the FedWatch algorithm developed by CME Group, there is a greater than 71% likelihood that the federal funds rate will rise by a quarter-point basis point in the near future. But, before the impact of the Silicon Valley Bank, the growing argument was over whether or not 25 or 50 basis points should increase the federal funds rate.

The bond market showed signs of having a more pessimistic outlook. The yield on the two-year Treasury note, which is sensitive to changes in expectations for future interest rates, increased by more than 0.2 percentage points. This is a significant movement for an asset that typically only swings by small fractions of a percentage point. A rebound followed a steep decline on Monday on Tuesday, which was a reaction to unpleasant flashpoints such as the collapse of Lehman Brothers in 2008.

Even if it continued to rise, the yield on the 10-year Treasury note stayed more stable, suggesting that longer-term economic growth expectations are becoming less optimistic.

This dissonance makes it even more difficult to forecast the course that will be taken going ahead. Some investors have warned that the financial markets might be destined for further days of tumultuous trading as investors attempt to make sense of the unclear picture.

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