People wait in line outside a New York City bank in late May.
Getty ImagesWeaker-than-expected economic data, rising coronavirus cases, and an unfavorable result for banks in Thursday’s Federal Reserve stress tests knocked the market lower on Friday.
The Dow Jones Industrial Average fell 521 points, or 2%, the S&P 500 lost 1.7%, and the Nasdaq Composite and Russell 2000 both declined 1.8%.
The Fed found that under an assumed worst-case economic scenario going forward, loan losses at the 33 largest U.S. banks could force them to dip into their capital reserves. That’s too large a risk, in the Fed’s eyes.
So regulators will cap how much cash the banks can pay out in dividends in the third quarter, in order to preserve capital. The Fed is also requiring them to suspend share buybacks, although most had already done so themselves earlier this year.
Bank shares tumbled on Friday, after rising on Thursday after the Federal Deposit Insurance Corporation announced an easing of the Volcker rule, imposed after the 2008-2009 financial crisis in order to limit risk taking by banks.
JPMorgan Chase stock (ticker: JPM) fell 4.4%, Goldman Sachs (GS) lost 6.5%, Wells Fargo (WFC) dropped 5.8%, and Bank of America (BAC) declined 4.8%. The KBW Bank Index was off 4.8%.
In other news, U.S. consumer spending rebounded 8.2% in May, compared with expectations for a bounce of 8.7%, as businesses reopened following lockdowns.
Investors are also keeping a close eye on climbing coronavirus infections in the U.S., with several states reporting daily records this week. Texas’s governor dialed back that state’s reopening on Friday, including closing bars and restricting the size of outdoor gatherings.
“There is no doubt that the second coronavirus wave news has been glum and it may maintain this narrative for some time but the fact is that smart money does see the Texas governor’s recent action of halting the further reopen efforts as a positive sign,” said Naeem Aslam, chief market analyst at AvaTrade, in a note to clients.
“For them, this is the step in the right direction to stamp out the current spike in Covid-19,” he said.
European markets pared earlier gains on Friday. The Stoxx Europe 600 index was up 0.1%, with the French CAC 40 and the U.K.’s FTSE 100 rising 0.4% and 0.7%, respectively. Asian stocks finished mostly higher, outside of a 0.9% drop for the Hang Seng index. In China, markets were closed for a holiday.
The price of gold slipped 0.9%, to $1,755.30 an ounce, continuing a retreat this week from recent levels that were the highest since 2012. The yield on the 10-year U.S. Treasury note fell 2 basis points, or hundredths of a percentage point, to 0.659%, as the price of the securities rose. The U.S. Dollar Index (DXY)—which measures the greenback against a basket of other currencies—ticked up 0.2%.
The price of oil also fell on Friday, with West Texas Intermediate crude down 1.6% to $38.15 a barrel and Brent down 0.7% to $40.75.
Nike (NKE) shares were down 4.9% after the sportswear maker posted a surprise loss as the pandemic hit its sales harder than expected.
Virgin Galactic (SPCE) shares fell 0.5% after its spaceship completed its second successful glide flight over southern New Mexico.
Tesla (TSLA) slipped 1.3% as Deutsche Bank raised its target for the electric-car company’s stock price to $900, below its recent levels near $1,000 a share.
Amazon (AMZN) confirmed reports that it will buy self-driving car developer Zoox. That would pit Amazon against Waymo, which is backed by Alphabet, Google’s parent company. Amazon shares were down 0.6% on Friday.
—Carleton English contributed to this article.
Write to Barbara Kollmeyer at bkollmeyer@marketwatch.com
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