Stocks close lower, Nasdaq misses bear-market exit as risks at regional banks, rate hikes take focus

By Vivien Lou Chen and William Watts

Federal Reserve is expected to deliver a quarter-point rate hike on Wednesday

U.S. stocks closed lower on Monday, giving up modest early gains, after it was announced that JPMorgan Chase & Co. would purchase much of failed First Republic Bank.

Some analysts left open the possibility of further turmoil in the regional banking sector, as investors turned their focus to this week's Federal Reserve policy meeting.

What happened

Stocks ended April on a positive note Friday, brushing off banking jitters. The Dow notched its best monthly performance since January, up 2.5% in April, while the S&P 500 advanced 1.5% and the Nasdaq gained less than 0.1% for the month, according to Dow Jones Market Data.

What's driving markets

A Federal Reserve decision looms this week, but the big news to kick off the week was in the U.S. banking sector.

In a deal announced on Monday, JPMorgan Chase & Co.(JPM) agreed to buy the bulk of California's First Republic BankFRC -- after an auction that reportedly included PNC Financial Services Group Inc. (PNC) -- and will split losses with the Federal Deposit Insurance Corp. The FDIC said the deposit-insurance fund is likely to take a $13 billion hit.

JPMorgan, which estimates the acquisition will generate more than $500 million of incremental net income per year, saw its shares finish 2.1% higher. PNC shares ended down by 6.3%. Trading was halted on shares of First Republic, which have plunged nearly 98% so far this year. First Republic came under renewed pressure last week after it disclosed $100 billion in deposit losses during the first quarter.

Key Words:Charlie Munger says banks 'full of' bad loans on commercial property: report

Analysts said the latest round of banking troubles was not causing serious repercussions in the broader markets, though some had doubts about whether regional banks could withstand further fallout.

"I don't think there's a true risk of contagion in the banking sector" and the market "barely blinked on the news" of JPMorgan's purchase earlier in the day, said Eric Sterner, chief investment officer at Apollon Wealth Management, which manages $3.5 billion from Mount Pleasant, S.C.

"But certainly, there's a risk of sentiment contagion," Sterner said via phone on Monday, citing social media's impact on customers willingness to withdraw deposits. "We may see some other regional banks that struggle, and the debate now is, 'Should there be more regulation?'"Jerry Braakman, president and chief investment officer of Santa Ana, California-based First American Trust, stood by comments he made to MarketWatch on Friday, when he said that regional-banking woes have more room to run. Among other things, Braakman said that all banks will be impacted by a weakening U.S. economy as credit losses and defaults rise over the next three to nine months. In addition, he said, "banks of all sizes have liquidity risk in a bank run scenario." First American Trust is a subsidiary of First American Financial Corp. (FAF).

See: This stock-market gauge shows investors are brushing off banking, debt-ceiling, and recession worries. Will it last?

Meanwhile, attention remains on the Fed, which is widely expected to raise the fed-funds rate by another 25 basis points, or quarter of a percentage point, when policy makers conclude a two-day meeting on Wednesday. Investors are looking for the Fed to signal the potential for a subsequent pause in rate increases, with traders pricing in rate cuts by year-end.

Read: Stock-market investors want the Fed to answer this crucial question when it meets this week

Monday's economic data included the latest reading of the Institute for Supply Management's closely watched manufacturing index, which The Institute for Supply Management's April manufacturing index rose to 47.1% from 46.3% in the prior month. Economists surveyed by The Wall Street Journal, on average, had looked for the index to rise to 46.7%.

The key barometer of U.S. factory activity has remained in contraction territory six months in a row -- with any numbers below 50% signaling ongoing malaise.

Spending on construction projects rose 0.3% in March at a seasonally adjusted annual rate of $1.83 trillion, the Commerce Department reported Monday. Economists polled by The Wall Street Journal had expected a flat reading.

Several foreign stock exchanges in Europe and Asia were shut for May 1 holidays.

Mark Hulbert:Sell in May? Not so fast. 'Stay and play' this summer in safer stock-market sectors

Companies in focus

-- Steven Goldstein contributed to this article.

-Vivien Lou Chen

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-01-23 1637ET

Copyright (c) 2023 Dow Jones & Company, Inc.