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US stock indices ended mix on Monday while investors attempted to assess what newfound stress in the banking system will mean for Federal Reserve policy.
Regional bank stocks plunged, and investors piled into government bonds to seek safety after regulators took extraordinary measures over the weekend to limit the impact of the collapse of Silicon Valley Bank.
Some stock investors found a possible silver lining: The rescue plan appears to shift, at least for now, the calculus on the path of the Fed's interest rate increases. Some investors are even hoping the central bank will cut interest rates this year, a sharp shift from before the bank meltdown.
The S&P 500 closed down 0.2% and the Dow Jones Industrial Average lost 0.3%. The Nasdaq Composite managed to gain 0.5%.
Since Friday, derivatives traders have repriced the probability of interest rate increases at next week's Fed meeting. The most likely case at the coming meeting is for no increase, according to futures market bettors. Last week, they had expected 0.50-percentage-point raise.
Meanwhile, economists at Goldman Sachs Group said they still expect rate increases in May, June and July, ultimately pushing interest rates to 5.25% to 5.5%.
Former Goldman Sachs Chief Executive Lloyd Blankfein said on Twitter that he sees a potential slowdown in Fed increases as a tailwind for markets.
"Anxiety and volatility [are] high, but sharply lower interest rates and the Fed likely on hold are strong positives for markets," Mr. Blankfein said.
The Treasury Department, the Fed and the Federal Deposit Insurance Corporation guaranteed all deposits of SVB, which collapsed after an attempt to raise capital led to a bank run. Regulators also said they had taken control of Signature Bank, which serves many cryptocurrency companies.
The moves initially appeared to shore up wavering confidence in the American banking system. Stock futures ticked higher overnight, before selling intensified in European trading. Major stock indices in the US opened in the red before flipping higher.
"When the Fed raises rates so quickly, nine times out of 10, it breaks things. We may see more corporate failures, we may see more regional banks go under," said Edward Smith, co-chief investment officer at Rathbones.
Regional bank shares plummeted, with investors' confidence shaken. Larger banks fared better, but the S&P 500's financial sector still ended 3.8% in the red.
First Republic, Western Alliance Bancorp, and Metropolitan Bank were the worst performers in the US stock market, all dropping by more than 40%. The KBW Bank Index, which tracks 24 leading banks, tumbled 11.7%. Wall Street's fear gauge, the Cboe Volatility Index, jumped to its highest in five months, to 26.7.
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