Wall Street’s rally faltered as concerns over credit quality affected two regional banks, highlighting the vulnerabilities of a $28 trillion bull market that is showing signs of fatigue. As bonds and gold saw gains, the S&P 500 suffered a nearly 1 percent decline following an optimistic outlook on artificial intelligence demand.
The downturn was exacerbated by disclosures from two regional lenders regarding issues with loan management tied to allegations of fraud, reigniting fears about deteriorating borrower creditworthiness. Zions Bancorp’s stock plummeted 12 percent after announcing a $50 million charge-off related to a loan from its subsidiary, California Bank & Trust. Meanwhile, Western Alliance Bancorp’s shares fell 10 percent after it reported complications with a borrower that failed to provide necessary collateral.
Steve Sosnick from Interactive Brokers remarked that the challenges appear isolated to these two banks, which, while comparable in size to Silicon Valley Bank—whose failure sparked a crisis two and a half years ago—have not shown signs of systemic risks thus far.
This surge in bank volatility coincides with the collapse of Tricolor Holdings, a subprime auto lender, which affected JPMorgan Chase & Co. in the third quarter, resulting in a $170 million charge-off that contributed to the bank’s increased credit cost. JPMorgan CEO Jamie Dimon issued a grim warning in light of these developments.
In geopolitical news, former President Donald Trump announced plans to meet Russian President Vladimir Putin in Hungary to discuss the ongoing war in Ukraine. This development came shortly before his meeting with Ukrainian President Volodymyr Zelenskiy.
A regional bank exchange-traded fund (ETF) plummeted approximately 6 percent, while Oracle Corp. surged after revealing promising margins for AI infrastructure projects. Benchmark 10-year treasury yields dipped below 4 percent, and two-year notes reached their lowest levels since 2022. Precious metal gold reached record highs.
Truist analyst David Smith raised the question of whether loan defaults attributable to fraud are better or worse for credit health compared to those resulting from typical business operations. He noted the increasing number of “one-off” incidents among commercial credits that are prompting investors to react more quickly. KBW’s Christopher McGratty added that Western Alliance’s efforts to mitigate losses are still impacting investor sentiment, especially for more credit-sensitive stocks.
Investor interest was also piqued by remarks from various Federal Reserve officials. Governor Christopher Waller stated that interest rates could be lowered in quarter-percentage-point increments to support a weakening labor market, while Stephen Miran advocated for a more significant reduction.
According to Citigroup strategists led by Beata Manthey, the equity bull market may be moving into a more volatile phase. With US-China trade tensions once again at the forefront, they described the stakes as high and the path to a resolution complex.
At a recent global economic summit in Washington, China’s announcement of unprecedented export controls on the rare-earth supply chain dominated discussions. Treasury Secretary Scott Bessent mentioned that US officials were collaborating with European allies, Australia, Canada, India, and other Asian democracies to formulate a comprehensive response.
Morgan Stanley’s Daniel Skelly emphasized the need for investors to focus on large-cap, quality companies amid the ongoing trade tensions, highlighting that while there is no impending recession, a cooling labor market and slow economic growth could pose challenges for lower-quality, unprofitable firms that benefitted from the recent market rally.
Investor caution is reflected in recent American Association of Individual Investors survey results, showing a drop in bullish sentiment from 45.9 percent to 33.7 percent during the week ending October 15. Bespoke Investment Group underscored the relatively rocky landscape for US equities, indicating that investor optimism was more muted than in previous months.
As investors prepare for an upcoming earnings season amid a government shutdown limiting economic data, Bret Kenwell from eToro noted that earnings reports will play a key role in shaping market narratives. He predicted that upcoming results could stabilize recent volatility or exacerbate it, with investors hoping for the former.
At Strategas, Ryan Grabinski pointed out that AI-related spending remains robust, as indicated by positive projections from Taiwan Semiconductor Manufacturing Company (TSMC), a key beneficiary of the surge in AI infrastructure initiatives. This followed a positive outlook from ASML Holding NV related to strong AI demand.
Fawad Razaqzada of City Index and Forex.com emphasized the importance of trading with prevailing market trends. He cautioned that those betting against the bullish momentum should take swift profits. Despite market fluctuations, retail investors continued their strategy of buying the dips. Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, remarked on the steadfast bullish conviction among retail investors, contrasting with institutional clients who have increasingly opted to hedge against market downturns in recent weeks.
The complexities of market dynamics and the contrasting attitudes among retail and institutional investors highlight the ongoing volatility in an evolving economic landscape.
