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Stocks Fell Amid Fed Concerns and Turbulence in Banking Sector

U.S. equities ended the day and week sharply lower, as the markets continued to look for hints regarding future monetary policy decisions. The moves came amid a flurry of news and economic data, as the February labor report showed stronger-than-expected job gains, and a lower-than-anticipated increase in wages, but a rise in the unemployment rate. The report was in stark contrast to January's blowout figures and seemed to soothe some of the anxiety over the Fed's future actions. Meanwhile, turbulence in the banking sector continued, as SVB Financial is reportedly in talks to sell itself after failing in its plans to raise capital. In earnings news, Ulta Beauty handily beat estimates and provided upbeat guidance, and Oracle offered mixed quarterly results and increased its dividend, but Gap fell well short of expectations amid a tumble in online sales, and it saw a shakeup in management. Treasury yields tumbled in the wake of the labor report and worries surrounding the banking sector, and the U.S. dollar was sharply lower, while crude oil and gold prices traded to the upside. Asian stocks finished lower, and markets in Europe saw widespread losses, led by shares of banking companies, amid uncertainty regarding the overall effects of rate hikes.

The Dow Jones Industrial Average decreased 345 points (1.1%) to 31,910, the S&P 500 Index fell 57 points (1.5%) to 3,862, and the Nasdaq Composite went down 199 points (1.8%) to 11,139. In moderate volume, 5.5 billion shares of NYSE-listed stocks were traded, and 6.1 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.96 to $76.68 per barrel. Elsewhere, the gold spot price went up $37.70 to $1,872.30 per ounce, and the Dollar Index lost 0.7% to 104.61. Markets ended noticeably lower for the week, as the DJIA dropped 4.4%, the S&P 500 declined 4.6%, and the Nasdaq Composite tumbled 4.7%.

Oracle Corporation (ORCL $84) reported adjusted fiscal Q3 earnings-per-share (EPS) of $1.22, versus the $1.20 FactSet estimate, as revenues rose 17.9% year-over-year (y/y) to $12.40 billion, compared to the $12.43 billion that the Street was expecting. The computer technology company cited constant currency growth of 48% for the total revenue of its two cloud businesses, infrastructure, and applications. Additionally, ORCL upped its dividend by 25% to $0.40 per share. ORCL traded lower.

Gap Inc. (GPS $11) posted an adjusted fiscal Q4 loss of $0.75 per share, far more than the $0.46 per share shortfall expected by analysts. Revenues fell 6.2% y/y to $4.23 billion, below the forecasted $4.36 billion. Same-store sales fell 3% y/y, while online sales, which represent 41% of total sales, plunged 10% from the same period a year ago. The apparel retailer—which owns its namesake brand, Banana Republic and Athleta—also saw a shakeup in management, as it eliminated its Chief Growth Officer role, its CEO of Athleta stepped down Thursday, and it is still in search of a permanent CEO for Gap. Looking ahead, GPS said it expects fiscal Q1 sales to decline by mid-single-digits, and full-year revenues to fall within the low-to-mid-single-digit range. Shares were lower.

Ulta Beauty Inc. (ULTA $521) reported adjusted fiscal Q4 EPS of $6.68, well ahead of the $5.70 FactSet estimate, as revenues jumped 18.2% y/y to $3.23 billion, compared to the $3.03 billion that the Street was forecasting. CEO Dave Kimball said that consumer spending across all income levels remained strong, with customers not trading down to cheaper options, despite higher prices amid persistently high inflation. Same-store sales rose 15.6% y/y, a move down from the 21.4% growth seen in the same period a year ago, but well above analysts' expectations for 8.4% growth. ULTA upped its full-year guidance for EPS within a range of $24.70 to $25.40 on revenues of between $10.95 billion and $11.05 billion, compared to the Street's forecasts of $24.37 per share and $10.47 billion, respectively. ULTA traded higher.

Turmoil in the banking sector continued, as SVB Financial Group (SIVB, trading halted), parent of Silicon Valley Bank, is in talks to sell itself, according to CNBC's David Faber, citing sources familiar with the matter. The news comes a day after a failed attempt to raise more than $2 billion in the capital, which included $1.25 billion in common stock, $500 million in convertible preferred shares, as well as $500 million in common stocks in a separate agreement with private-equity firm General Atlantic. SVIB also announced that it sold "substantially all" of its available-for-sale securities, or roughly $21 billion, which it said will result in a $1.8 billion post-tax loss. Trading in shares of SIVB was halted today pending news after it plunged more than 60% yesterday.

The stock markets have seen increased volatility lately, but the S&P 500 and Nasdaq are holding on to gains for 2023. Investors have grappled with how much more aggressive the Fed will be to combat persistent inflation, and what the ultimate impact will be on the economy and financial conditions. Meanwhile, economic data has remained mostly positive to foster the uncertainty, with labor reports topping forecasts, consumer spending continuing, services sector growth expanding, and manufacturing output showing signs of improvement.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Caveat Emptor: Important Market Shifts Underway, how given the topsy-turvy nature of the market thus far in 2023, it remains crucial for investors to know what they are buying—especially as it relates to growth, value, and quality. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.February job growth modestly ahead of forecasts, unemployment rate risesNonfarm payrolls (chart) rose by 311,000 jobs month-over-month (m/m) in February, compared to the Bloomberg consensus estimate of a 225,000 rise, while January's figure was downwardly adjusted at an increase of 504,000 from the initial 517,000. Excluding government hiring and firing, private sector payrolls advanced by 265,000, versus the forecasted rise of 215,000, after increasing by 386,000 in January, negatively revised from the preliminarily reported 443,000 gain. The labor force participation rate increased to 62.5% from January's unrevised 62.4% figure, where it was expected to remain.

The unemployment rate rose to 3.6%, compared to expectations for it to remain at January's 3.4% level. The underemployment rate—including total unemployed and those employed part-time for economic reasons, along with people who are marginally attached to the labor force—increased to 6.8% from the prior month's 6.6% rate. Average hourly earnings were up 0.2% m/m, below expectations and January's 0.3% reading. Compared to last year, wages were 4.6% higher, below forecasts of a 4.7% increase, and higher than January's unadjusted 4.4% rise. Finally, average weekly hours fell to 34.5 from January's 34.6 rates, where it was expected to remain.

Treasury rates were sharply lower, as the yield on the 2-year note plunged 31 basis points (bps) to 4.58%, the yield on the 10-year note dropped 23 bps to 3.69%, and the 30-year bond rate fell 18 bps to 3.69%.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, How to Prepare for Landing, how a "soft landing," with declining inflation but positive growth, would be ideal. However, she points out that turbulence appears likely. Kathy offers insight on how to handle it. You can follow Kathy on Twitter @KathyJones.

Next week's economic calendar will be robust and offer a number of reports that could amplify the focus on the Fed ahead of its March 22 policy decision. Likely garnering the lion's share of attention will be the February inflation landscape, with the Consumer Price Index (CPI), Producer Price Index(PPI), and Import Price Index all slated for release. A look at the all-important consumer psyche will come via the February retail sales report and the preliminary University of Michigan Consumer Sentiment Index for March. Housing will be on display courtesy of the NAHB Housing Market Index, housing starts and building permits, and the weekly read on MBA Mortgage Applications. Other reports of note include the Fed's industrial production and capacity utilization report, the Leading Economic Index (LEI), business inventories, initial jobless claims for the week ended March 11, as well as regional manufacturing reads from the New York and Philadelphia regions.

European stocks fell amid monetary policy uncertainty, weakness in banks

Stocks in Europe were sharply lower across the board, led by losses in banking shares, following turbulence in the sector amid events surrounding SVB Financial Group. Investors also digested a stronger-than-expected labor report in the U.S., as well as this week's Congressional testimony from Fed Chairman Jerome Powell, in which he signaled that the Central Bank could get more aggressive with rate hikes and could leave rates higher for longer than initially anticipated. The Fed, along with the European Central Bank and Bank of England, have aggressively tightened monetary policy as they work to cool persistent inflation. The markets have been volatile amid this backdrop.

However, despite the recent choppiness in the markets, equities in the region have had a strong start for 2023, buoyed by signs that warmer-than-expected winter weather may help the region avoid an energy crisis, as well as China’s reopening. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, The Everything Everywhere All at Once Rally, how despite market volatility, inflationary pressures, and a potential earnings recession, a rally involving stocks, bonds, and some commodities started in November still persists. You can follow Jeff on Twitter: @JeffreyKleintop.

Economic news in the region was robust today. Retail sales in Spain jumped well above expectations, wholesale prices in Italy cooled significantly last month, and consumer prices in Germany were steady and remained elevated. Meanwhile, industrial production in the U.K. fell more than forecasts, but Q4 GDP in the nation grew 0.3%, rebounding from last quarter to avoid a recession. The euro and the British pound rose versus the U.S. dollar, while bond yields in the Eurozone and the U.K. fell.

The U.K. FTSE 100 Index and Switzerland's Swiss Market Index dropped 1.7%, France's CAC-40 Index and Germany's DAX Index fell 1.3%, Spain's IBEX 35 Index lost 1.5%, and Italy's FTSE MIB Index traded 1.6% lower

Asia tumbles in wake of U.S. selloff

Stocks in Asia ended sharply lower following yesterday's selloff in the U.S that came amid weakness in the Financials sector. Caution was also prevalent ahead of the February labor report in the U.S., as it could offer some additional insight as to how aggressive the Fed may remain. Elsewhere, the Bank of Japan (BoJ) left rates unchanged, as widely expected, and Kazuo Ueda was approved as the next BoJ governor. Investors continue to wrestle with uncertainty on the ultimate impact of the monetary policy tightening on global financial conditions and the economy. However, Schwab's Jeffrey Kleintop discusses in his latest article, Are You Focused on the Wrong Central Bank?, how while investor attention is on the Fed, changes at the Bank of Japan might bring shifts to the economic environment, impacting the global markets. In light of economic news, February wholesale prices in Japan cooled for a second-straight month, while household spending in the island nation fell more than expected in January. Elsewhere, China's new yuan loans came in higher than forecasts for December, while aggregate financing—a measure of total credit issued—topped expectations.

Japan's Nikkei 225 Index fell 1.7%, with the yen losing ground against the U.S. dollar. China's Shanghai Composite Index declined 1.4%, and the Hong Kong Hang Seng Index plunged 3.0%. Australia's S&P/ASX 200 Index dropped 2.3%, South Korea's Kospi Index decreased 1.0%, and India's BSE Sensex 30 Index traded 1.1% lower.

Next week's international economic calendar will be less robust, with items slated for release to include: China—industrial production and fixed asset investment. Australia—business confidence and employment data. Japan—core machinery orders, trade balance, industrial production, and retail sales. Eurozone—industrial production, CPI, and trade balance, along with German wholesale prices. U.K.—employment figures and CPI. In central bank action, the European Central Bank will announce its monetary policy decision.


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