Dark clouds descend over US stocks

The S&P 500 index plummeted as a wave of bank collapse sent shivers in the financial market. The closely-watched blue-chip index retreated to a low of $3,918, the lowest level since January 20th. It has retreated by more than 6.7% from the highest point this year, meaning that it is nearing a correction area.

From bad to worse

The S&P 500 index has been in a bearish trend as investors remained concerned about the financial market. The biggest emerging concern is that the number of bank collapses in the US is slowly rising. Earlier this week, Silvergate Capital announced that it was liquidating its company as concerns about its business escalated.

And on Thursday, the SVB stock price tumbled by over 60% in regular hours and by 20% in extended hours. Many venture capital companies, including Peter Thiel’s Founder’s Fund, have started pulling funds from the company. As such, there are still elevated risks that the company will also collapse.

The situation is not looking good across the pond. In Switzerland, Credit Suisse stock has declined to its record low as depositors withdraw their funds. There are concerns that the iconic Swiss bank will be the next big shoe to drop.

Therefore, the S&P 500 index is falling because of the significance of the banking sector in the US economy. If banks continue falling, we can’t rule out a situation where the index continues to plummet as investor confidence drops. Unlike other sectors, the banking sector is seen as the heartbeat of the economy.

The collapse of SVB should also worry investors because of its business strategy. Unlike other giant banks like JP Morgan and Morgan Stanley, the company banks for technology companies, which have powered the American economy. If it collapses, then it means that challenges in the sector will continue in the coming months.

Federal Reserve tightening risks

The other big risk for the S&P 500 index is the fact that the Federal Reserve is not about to slam the brakes on tightening. In his testimony to Congress, the Fed chair noted that the bank will continue hiking interest rates in the coming months. 

Analysts believe that the Fed will hike interest rates by 0.50% this month. They also expect that the bank will increase rates to between 5.5% and 6.0% this year. If this happens, it will be a new era in the financial market, which has been accustomed to low-interest rates. 

Therefore, the upcoming US non-farm payrolls (NFP) data will have an impact on the next Fed decision. They will be followed by next week’s consumer and producer inflation data. My crystal ball tells me that inflation remained at an elevated level in February. 

Therefore, we could see the S&P 500 index plunge in the coming weeks. This is in line with what Jeremy Grantham and Morgan Stanley’s Mike Wilson have been warning. As I wrote here, Grantham expects that the S&P 500 index will drop to about $3,200 soon. As I wrote here, Wilson expects the S&P and SPY ETF to plummet soon.