Dow suffers worst week since June as U.S. stocks end sharply lower after employment report, banking sector fears

What drove markets

U.S. stocks slumped amid investor concerns about the banking sector after the closure of Silicon Valley Bank by the Federal Deposit Insurance Corp and in the wake of the monthly employment report released Friday.

In a sign of investor anxiety, the CBOE Volatility Index
VIX,
+9.69%
was up Friday afternoon at almost 25, after jumping Thursday, according to FactSet data, last check.

“Bears came out of hibernation this week after waking up to a warning shot from the banking space,” said Adam Turnquist, chief technical strategist for LPL Financial, in emailed comments Friday, pointing to the collapse of Silicon Valley Bank.

Silicon Valley Bank was closed Friday by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corp. was appointed receiver, with the bank becoming the first FDIC-backed institution to fail this year.

Read: Bank ETFs fall amid concerns over SVB and ‘crack’ in financial system after rate hikes

The SPDR S&P Regional Banking ETF
KRE,
-4.39%
was down more than 4% Friday afternoon, FactSet data show, while shares of Bank of America Corp.
BAC,
-0.88%
closed 0.9% lower, Citigroup Inc.
C,
-0.53%
slid 0.5% and JPMorgan Chase & Co.
JPM,
+2.54%
rose 2.5%.

Worries over the banking sector are “probably overshadowing” the positive aspects of the employment report, said Karim El Nokali, investment strategist at Schroders, in a phone interview Friday.

The U.S. employment report for February showed the labor market continued to grow at a robust pace last month, with the U.S. economy adding 311,000 jobs, more than the 225,000 that economists polled by the Wall Street Journal had expected.

But “if you dig a little deeper” into the report, average hourly earnings came in “a little lighter than expected” while labor-force participation ticked up, which are positive developments from an inflation standpoint, said El Nokali.

Average hourly wages grew by 0.2%, a slower rate than the 0.3% rate economists had expected. It was also less than the 0.3% increase in January. The unemployment rate ticked higher to 3.6%, helped by an increase in the labor-force participation rate.

“On the margin,” said El Nokali, the employment report was “positive for the equity market.” He said it would “probably argue more” for the Federal Reserve to raise its benchmark rate by 25 basis points at its policy meeting later this month, as opposed to a 50-basis-point hike that investors had been fearing leading up to the employment data.

See: Jobs report shows strong 311,000 gain in February, puts pressure on Fed for bigger rate hike

Fed Chair Jerome Powell said earlier this week that the “totality” of jobs and inflation data would determine whether the central bank would go back to raising its policy interest rate by another 50 basis points at its meeting later in March.

After climbing earlier in the week, odds of a 50-basis-point rate hike by the Fed have moderated over the past 24 hours. Traders now see a 62% chance of the central bank raising its benchmark rate by 25 basis points, according to the CME FedWatch Tool.

Meanwhile, Treasury yields sank Friday.

The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.594%
dropped 31.4 basis points to 4.586%, while the 10-year Treasury yields fell 22.8 basis points to 3.694%, according to Dow Jones Market Data. The Treasury yield curve remains massively inverted, which has contributed to banks’ woes.

Companies in focus

• SVB Financial Group, the parent of Silicon Valley Bank, saw its shares halted for volatility after falling 60% on Thursday. The bank was taken over by the FDIC helping to a broader selloff in regional and international U.S. banks that has weighed on the broader market.

• Barnes & Noble Education Inc.
  BNED,
  +6.98%
  climbed 7% after the company trimmed its third-quarter loss to 48 cents per share from a loss of 71 cents a year ago. 

• Oracle Corp.
  ORCL,
  -3.22%
  shares dropped 3.2% after the software company’s fiscal third-quarter revenue fell short of Wall Street expectations. Adjusted earnings were $1.22 per share, compared to $1.13 in the year-ago period.

• DocuSign Inc.
  DOCU,
  -22.85%
  shares tumbled almost 23% despite the former work-from-home favorite delivering better-than-expected quarterly results after the close of Thursday’s session.

• Gap Inc.
  GPS,
  -6.13%
  shares slid 6.1% after the clothing retailer predicted first-quarter sales could fall “in the mid-single-digit range” compared to the same quarter last year. The company said it would lay off executives and thin management layers as part of a bid to cut $300 million in costs.

—Steve Goldstein contributed to this report.