U.S. stocks closed lower on Tuesday in a broad sell-off after the downgrading of several lenders by credit rating agency Moody’s reignited fears about the health of U.S. banks and the economy.
After a five-month rally pushed the benchmark S&P 500.SPX and Nasdaq Composite.IXIC within 5% of their lifetime highs, August has now recorded five losing sessions out of six.
Tuesday’s decline was triggered after the agency cut ratings on 10 small- to mid-sized lenders by one notch and placed six banking giants, including Bank of New York Mellon BK.N, U.S. Bancorp USB.N, State Street STT.N and Truist Financial TFC.N, on review for potential downgrades.
Moody’s also warned that the sector’s credit strength would likely be tested by funding risks and weaker profitability.
Market confidence in U.S. banks has been gradually returning after the failures of three lenders earlier this year, including Silicon Valley Bank, shocked the financial system.
The S&P 500 Banks index.SPXBK remained weaker year to date, despite steady gains by the benchmark S&P 500 index .SPX, and the downgrades exposed the fragility of investors’ confidence towards financial stocks.
The banks index slid on Tuesday, as did the KBW Regional Banking index.KRX.
Big banks Goldman Sachs GS.N and Bank of America BAC.Neased, while Bank of New York Mellon and Truist were also down.
Jason Pride, chief of investment strategy and research at Glenmede, noted that Moody’s downgrades, as well as the notice given to larger banks about possible future action, were a public statement about the agency’s concerns for the health of the banking system, and this affects the wider economy.
“I think it’s a big deal in the bigger picture of how the economy operates, because regional banks’ lending is one of the main lubricants of the economy,” he said.
“If it slows down, the engine just doesn’t work as well.”
(REUTERS)