Stocks End Higher for the Week

Major U.S. stock indexes ended slightly higher Friday, eking out a modest gain for an otherwise choppy week roiled by shifting concerns over the banking system, the Federal Reserve's interest rate plans, and the health of the broader economy.

Shares of Deutsche Bank (DB) tumbled Friday as the German lender became the latest bank to bear the brunt of investor concerns about the health of the global financial system following the forced takeover of Credit Suisse (CS) and the closures of several U.S. banks in recent weeks. Spooked by the run of negative news, banks generally appear to be scaling back lending, which could limit the amount of capital in circulation.

Investors are also digesting the potential effects of the Fed's enactment Wednesday of another quarter-point interest rate increase, as the central bank confronts challenges from the banking turmoil and still-high inflation. Speaking at the conclusion of the Fed's meeting this week, Chairman Jerome Powell was ambiguous about future Fed moves, suggesting "some additional policy firming may be needed."

Treasury yields dropped near seven-month lows, a seeming indication of escalating recession worries after the Fed raised its benchmark lending rate nine times to a range of 4.75% to 5% over the past year. The release next week of updated data on consumer confidence, inflation, and economic growth will likely be in focus.

The swings in stock prices this week "were consistent with the unclear outlook for monetary policy, the banking system, and the broader economy," says Kevin Gordon, senior investment strategist at Charles Schwab. "More time needs to pass before we know the true impact of the expected tightening in credit conditions."

• The S&P 500® Index was up 22.27 (0.6%) at 3970.99; the Dow Jones industrial average was up 132.28 (0.4%) at 32,237.53; the Nasdaq Composite was up 36.56 (0.3%) at 11,823.96.

• The 10-year Treasury yield was little changed at about 3.374%.

• Cboe's Volatility Index was down 0.87 at 21.74.

The real estate sector led the gainers Friday, followed by consumer staples and health care. Financials and consumer discretionary stocks edged lower, and technology stocks were little changed, though the tech-focused Nasdaq Composite still notched its second straight weekly gain. Gold and crude oil futures both declined, while the U.S. dollar strengthened.

Further concern over Europe's banks

Banking concerns weighed on prices earlier Friday, illustrating the market's sensitivity to perceived instability in the sector. Deutsche Bank's shares fell sharply earlier in the session before recovering some of their losses, and the bank's credit default swaps—the cost to insure against default in the company's debt—rose sharply. Deutsche Bank's woes appeared to have more to do with the downbeat sentiment toward banks generally than any particular cause.

In the U.S., the market appears to be confident the Fed is near the end of its recent tightening cycle. Late Friday, investors put the odds of the Fed keeping rates unchanged at its May meeting at nearly 88%, according to the CME FedWatch Tool.

However, even if rates are at or near their peak for the cycle, that doesn't mean credit conditions are loosening, Kevin notes.

"Keep in mind that, even if the Fed is done hiking, the policy will get increasingly tight," Kevin says. "Falling inflation and tightening credit conditions—with rates staying at 5%—is restrictive for the economy. We continue to think that the credit tightening coming from the banking crisis will exacerbate what was already in the pipeline."

Economic data released Friday offered an indication of how all this tightening is affecting the broader economy.

The Commerce Department reported U.S. durable goods orders in February fell 1% from January, the third decline in the past four months. Economists had been expecting an increase of 0.6%. Excluding transportation, new orders were "virtually unchanged," the department said.

Next week will bring traditional end-of-the-quarter data, including a final government read on fourth-quarter economic growth, inflation (the Personal Consumption Expenditure) for February, and Chicago Purchasing Managers Index.

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