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Stocks rose for a second day on Tuesday, with shares of regional lenders sharply higher, as investors awaited a decision from the Federal Reserve on whether it will hold off on further interest rate increases that have already shaken the financial system.
The S&P 500 index rose 1.3 percent, in step with markets in Europe and Asia.
Bank shares rallied, as Treasury Secretary Janet L. Yellen expressed confidence in the nation’s banks on Tuesday and suggested that the government would step in to protect smaller banks if needed. Some lawmakers in Washington are discussing ways to raise the limit for federal deposit insurance above $250,000, possibly by temporarily increasing the cap on accounts that are used for activities like payroll.
Already, financial markets had begun to settle on Monday after measures were taken to shore up Europe’s banks, with Swiss regulators orchestrating the takeover of Credit Suisse by UBS.
“The signal of confidence is what is most important,” analysts at Wells Fargo noted, referring to the deal.
First Republic Bank, the regional lender that has become the focus of Wall Street’s concerns about the U.S. banking system, rose more than 29 percent in afternoon trading, a heady gain that nonetheless recovered only a small fraction of the value of its beaten-down shares. First Republic’s stock has still fallen about 90 percent this month, erasing tens of billions of dollars in market value.
The bank has been entertaining some possible buyers after a $30 billion cash infusion from the country’s largest banks failed to restore confidence among investors. Analysts at Morningstar “struggle with why a buyer would be motivated to step in, except perhaps if it were being pushed for by regulators,” they wrote in a new report about First Republic’s prospects.
Still, investors took solace from the authorities’ support. An index that tracks the largest banks in Europe, which have been swept up in the turmoil after U.S. regulators seized two midsize lenders, Silicon Valley Bank and Signature Bank, jumped 4 percent. UBS gained 12 percent in Switzerland.
Shares of other regional banks also rose. Zions Bancorporation gained 7 percent, while PacWest Bancorp jumped nearly 19 percent, and Western Alliance rallied about 15 percent.
However, investors said the current calm might portend a storm. A critical question, particularly for those worried about the effects of higher interest rates on banks’ balance sheets, is what the Fed will do when its Federal Open Market Committee, which sets interest rate policy, meets this week.
Higher interest rates have helped slow the economy and lower stubborn inflation, but they have also raised costs for companies and contributed to the instability in the banking sector. Lower rates could support the banks, but at the risk of letting inflation get out of control.
“The competing objectives of continuing the campaign to re-establish price stability while ensuring against further banking sector contagion has presented a meaningful challenge to the F.O.M.C.,” analysts at BMO Capital Markets wrote.
Before stress in the banking system erupted, investors were braced for an increase of half a percentage point in interest rates. Now, the consensus is for a quarter-point increase, while some investors and economists believe that the Fed might not raise rates at all.
The uncertainty shows just how quickly the banking crisis has upended views in the markets. A few weeks ago, the question was whether the Fed would ramp up the pace of its interest rate increases. Now, traders are betting on a series of rate cuts beginning in the summer.
Economists have begun to warn that the trouble in the financial system could weigh on the broader economy, if lenders begin to pull back as they look to shore up their own finances.
“Recent events strengthen our conviction that a recession remains the most likely outcome for the economy over the next year,” analysts at Deutsche Bank wrote.
That is not necessarily a bad thing for markets, as analysts at Bank of America pointed out that a gauge of investor pessimism had plumbed depths associated with the low point in markets during previous cycles. In addition to the recent gains for stocks, oil prices and yields on government bonds — two key measures of concerns about the economy — rose for a second session on Tuesday.
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