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Dow ends up 400 points on optimism about potential debt-ceiling deal, rebound in regional banks

By Isabel Wang and Frances Yue

Nasdaq Composite books its highest close since August 2022

U.S. stocks finished sharply higher on Wednesday with the Nasdaq Composite logging its highest close since August 2022, buoyed by optimism about a resolution of the debt-ceiling debate in Congress after President Biden expressed confidence about achieving a bipartisan deal, while a bounce in regional bank shares also provided a boost for the major indexes.

How stocks traded?

On Tuesday, the Dow industrials finished 336.46 points, or 0.1%, lower at 33,012.14, and traded negative year-to-date for the first time since May 4. The S&P 500 closed 26.38 points lower, or 0.6%, to 4,109.90, and the Nasdaq Composite lost 22.16 points, or 0.2%, to 12,343.05.

Read:Nasdaq is leading the Dow by the widest margin since 1991 as blue-chip gauge erases 2023 gain. Is that a good sign?

What drove markets?

Stocks rallied on Wednesday on cautious optimism about a resolution of the U.S. debt-ceiling debate in Congress.

President Joe Biden sounded upbeat Wednesday as a divided Washington continued to work on achieving a bipartisan deal that raises the ceiling for federal borrowing and avoids a market-shaking default.

"I'm confident that we'll get the agreement on the budget, and America will not default," Biden said during a brief speech at the White House.

Biden's remarks underscore earlier comments from House Speaker Kevin McCarthy, who told CNBC in an interview earlier Wednesday that he doesn't think the U.S. will default on its debt.

See: Biden expresses confidence on achieving debt-ceiling deal: 'America will not default'

However, James Ragan, director of wealth management research at D.A. Davidson, said stocks could be "vulnerable if we get to an impasse."

His team noticed that market participants started positioning more defensively due to the weakness in cyclical sectors including energy, materials, and financials, which are leading the market lower this month, but "it's hard to say if that's due entirely to the debt negotiations," Ragan said.

Treasury Secretary Janet Yellen has warned that June 1 could be the date when the U.S. may become unable to pay its bills in the absence of a debt-ceiling increase.

Concerns about potential impact on markets of a technical U.S. default has helped keep the S&P 500 index confined to a tight range between 3,800 and 4,200 in recent weeks.

"There's still a lot of uncertainty and the debt ceiling is part of the issue and maybe limiting the upside of the market," Ragan told MarketWatch in a phone interview. "But even we get through that, our concern is what is it going to take to break the market out of that 4,200 range."

Peter Cardillo, chief market economist at Spartan Capital, said in a note that the stock averages have not moved out of their trading ranges, which suggests that the market is likely to "trade sideways as the earnings season comes to an end and the focus shifts toward the June 13-14 FOMC [Federal Open Market Committee] meeting."

See: Western Alliance Bancorp deposit growth sparks rally in bank stocks

Regional bank stocks bounced on Wednesday, with shares of Western Alliance Bancorp (WAL) ending 10.2% higher after the lender said its deposits grew by $2 billion in the second quarter

The Invesco KBW regional bankindex (KBWR) finished 7.2% higher and logged its biggest one-day percentage gain since Jan. 6, 2021 when it rose 7.8%, according to Dow Jones Market Data. The SPDR S&P Regional Banking ETF (KRE) advanced 7.4%.

In U.S. economic data, construction on new homes rose 2.2% in April, as U.S. homebuilders continue to see strong demand from buyers. Housing starts rose to a 1.4 million annual pace last month from 1.37 million in March, the government said Wednesday, meaning that's how many houses would be built over an entire year if construction took place at the same rate in every month as it did in April. The data roughly matched economists' expectations on Wall Street.

Companies in focus

-- Barbara Kollmeyer contributed to this article.

-Isabel Wang

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.

 

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05-17-23 1629ET

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