Banking Crisis Aftermath and More Economic Data: What to Watch in the Stock Market in the Week Ahead

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It was a big week for the stock market as investors contended with major stress in the banking system and yet another rate hike from the Federal Reserve. So where do we go from here?

“The primary focus of investors in the week ahead should continue to be on the fallout from the banking crisis,” as well as the effects of the Fed’s latest quarter-point interest rate hike and upcoming consumer spending data, Ross Mayfield, investment strategy analyst at Baird, tells Money.

Here’s what experts will be watching the week of March 27:

Investors are still processing the banking crisis

The collapse of Silicon Valley Bank earlier this month — and the turmoil that has hit the banking industry in its wake — is continuing to reverberate throughout the markets. Investors will be watching bank stocks closely for more signs of contagion, and experts have their eyes on broader effects, too.

The banking shock and its hit to consumer confidence, credit availability and business investment brings about the possibility that a recession could start as soon as the end of this year, Gargi Chaudhuri, head of iShares Investment Strategy, Americas, said via written commentary shared with Money.

But there may be a silver lining: In a research note earlier this week, Morgan Stanley strategists suggested that the banking crisis and subsequent action of regulators to prevent more banks from collapsing “represents the beginning of the end of the bear market.” (U.S. regulators guaranteed all deposits at Silicon Valley Bank and Signature Bank after their failures, which is above the usual limit of $250,000 per depositor, per account type, per institution.)

The strategists argue a ripple effect could force market participants to recognize that earnings estimates are far too high, and in turn, analysts could slash expectations and companies could lower guidance on their upcoming earnings reports. When earnings reports come in lower than expected, stocks tend to sink.

Expect volatility ahead

Better days may be ahead, but it likely won’t be a smooth road. Wilson notes that the end of a bear market can be “vicious,” with prices falling sharply.

In the immediate near term, “volatility is likely to remain elevated given the heightened uncertainty,” Mayfield says. That’s because “looming worries about the depth and breadth of the weakness” in the financial system remain, despite the fact that quick action from regulators was able to control the crisis in the short term. Those worries are exasperated by the fact that investors aren’t sure what path the Fed will take next.

The Fed has been hiking interest rates in an attempt to bring down inflation, but higher interest rates tend to weigh on the price of financial assets like stocks and bonds.

More inflation data to come

March 31 will also bring the release of government data on consumer spending and income in the form of the Personal Consumption Expenditures (PCE) price index. That data will give experts insight into how much Americans spent in February, as well as another measure of inflation — but Mayfield notes it won’t be as useful as usual because it doesn’t include all the turmoil we saw this month.

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