In just one week, the market's "script" has been turned upside down. Almost a year has passed since the Federal Reserve began raising interest rates in response to high inflation. Investors have been watching for the past year to see when the central bank might end its interest rate hikes. At first, few investors included bank failures in their list of potential market risks for 2023.

On March 13, the KBW Bank Index plunged about 11% and the SPDR Regional Bank ETF fell more than 12% at one point, both the largest one-day declines in the past two years. Among them, First Republic Bank (FRC) fell by more than 80% at one point, while Alliant West Bank (Western Alliance Bancorp) plunged about 75% and suffered multiple meltdowns; Westpac United Bank (PacWest Bancorp) fell by more than 48%, and Credit Suisse also plunged by more than 20% at one point. Credit Suisse shares had plunged more than 30% during the day on Thursday, reaching a record low of CHF 1.55 per share and increasing market fears. Previously, the bankruptcy of Silicon Valley Bank as the beginning of the United States in a week there are three bank failures, the banking industry set off an unprecedented panic.

Now, with the bankruptcy of Silicon Valley Bank and the resulting market turmoil, the situation has changed. The Federal Reserve will weigh the risks to financial stability and persistent inflation at next week's policy meeting. For investors, these two concerns are suddenly at the forefront.

Zach Hill, portfolio manager at Horizon Investments, which manages nearly $7.3 billion in assets, told the Wall Street Journal that in recent months "curbing inflation has really been the Fed's only goal, and now we've introduced the concept of financial instability. It's not very clear how the Fed is going to balance that."

Last week, investors were debating whether the Fed would raise rates by 25 basis points, as officials did in February, or by 50 basis points, as they did in December. Now, investors are more interested in the question of whether the Fed will raise rates next week.

The S&P 500, up 0.4% in 2023, gave back almost all of its gains from the beginning of the year after a series of stronger-than-expected economic data were released. Government bond yields tumbled after rising for much of the year, reflecting a sudden rush to safe assets in the market.

Inflation remains on fire. The Labor Department said Tuesday that the consumer price index rose 6 percent in February from a year ago. Although price pressures have cooled for eight straight months, inflation remains well above the Federal Reserve's 2% target. Last week's jobs report told a similar story: The U.S. added 311,000 jobs in February, more than economists expected, but down sharply from the 517,000 jobs in January.

Sam Stovall, chief investment strategist at CFRA, told the Wall Street Journal, "Things have gotten very different recently, and now we really need to talk about things that could adversely affect the economy, the markets and our portfolios."

The market turmoil began last Thursday when shares of SVB Financial Group, the parent company of Silicon Valley Bank, plunged 60 percent amid a run on deposits. The stock did not open for trading Friday, and the bank was seized by the Federal Deposit Insurance Corp. that morning and is now exploring various possibilities to sell its assets.

Silvergate Capital Corp. and Signature Bank, two of the largest banks serving cryptocurrency companies, have also collapsed in recent days.

Regional bank stock prices plummeted but bounced back after government officials took steps to limit the impact. On Tuesday, Moody Investor Services cut its outlook on the U.S. banking system, citing a "rapidly deteriorating business environment. The ratings firm put the credit ratings of six U.S. banks on a review list for possible downgrades.

Credit Suisse's stock and bond prices plunged Wednesday after European regulators contacted it about its financial exposure to troubled Silicon Valley banks.

Moody said further rate hikes could worsen the bank's problems. Futures traders see a continuation of the 0.25 percentage point rate hike or no rate hike next week as fairly likely.

Investors remain wary of signs of contagion, with strategists at JPMorgan Chase Bank warning Monday that losses in the bond market could put pressure on other asset classes, such as commercial real estate, private equity and venture capital.

Futures traders said, "When the economy slows and financing costs rise, all of these implicit or explicit arbitrage trades are forced to close out, leading to the end of the cycle."

Investors seeking safe assets led to a frenzy of trading: As of Monday, the yield on two-year U.S. Treasuries posted the biggest three-day drop since 1987. Yields on longer-dated Treasuries also fell sharply. When bond prices rise, bond yields fall.

This rise in Treasuries came after short-term bond yields had risen steadily in the previous month.

Speaking with the Wall Street Journal, Thomas Martin, a portfolio manager at Globalt Investments, likened the sudden change in market sentiment to "like suddenly you get a slap in the face."

According to Quantitative Brokers, liquidity in the 10-year U.S. Treasury futures market is now less than half of what it was before the Silicon Valley bank collapse. Declining liquidity means that one particular trade could have a greater impact on market prices.

The disruption has spread beyond the bond market. The S&P 500 fell 4.5 percent last week, its worst week of performance this year. After a brief respite, the index plunged again on Wednesday, falling 1.7% in early trading.

The KBW Bank Index has fallen 22% in the past week. On Monday, Wall Street's fear gauge, the Cboe Volatility Index, reached its highest level in months. Put options on all stocks and exchange-traded funds traded at record highs on Friday, according to Cboe Global Markets. And bitcoin prices soared.

Investors are worried that a credit scare could discourage regional banks from lending to individuals and businesses, and that could lead to a contraction in the economy. The Russell 2000 index, which tracks smaller companies, has fallen 7.8% in the past week.

The shock has investors waiting for signals about how it could affect the Fed's long-term plans and reassessing the contents of their portfolios.

Mr. Hill told the Wall Street Journal, "We're taking a close look at the assets we own, looking for opportunities, and possible problems."

Some investors and strategists remain bullish on the market, provided the credit crisis subsides soon and the Federal Reserve finally decides to suspend interest rate hikes.

CFRA's Mr. Stovall told the Wall Street Journal that his year-end price target for the S&P 500 is 4360, about 10% above current levels.

In just one week, the market's "script" has been turned upside down. Almost a year has passed since the Federal Reserve began raising interest rates in response to high inflation. Investors have been watching for the past year to see when the central bank might end its interest rate hikes. At first, few investors included bank failures in their list of potential market risks for 2023.

On March 13, the KBW Bank Index plunged about 11% and the SPDR Regional Bank ETF fell more than 12% at one point, both the largest one-day declines in the past two years. Among them, First Republic Bank (FRC) fell by more than 80% at one point, while Alliant West Bank (Western Alliance Bancorp) plunged about 75% and suffered multiple meltdowns; Westpac United Bank (PacWest Bancorp) fell by more than 48%, and Credit Suisse also plunged by more than 20% at one point. Credit Suisse shares had plunged more than 30% during the day on Thursday, reaching a record low of CHF 1.55 per share and increasing market fears. Previously, the bankruptcy of Silicon Valley Bank as the beginning of the United States in a week there are three bank failures, the banking industry set off an unprecedented panic.

Now, with the bankruptcy of Silicon Valley Bank and the resulting market turmoil, the situation has changed. The Federal Reserve will weigh the risks to financial stability and persistent inflation at next week's policy meeting. For investors, these two concerns are suddenly at the forefront.

Zach Hill, portfolio manager at Horizon Investments, which manages nearly $7.3 billion in assets, told the Wall Street Journal that in recent months "curbing inflation has really been the Fed's only goal, and now we've introduced the concept of financial instability. It's not very clear how the Fed is going to balance that."

Last week, investors were debating whether the Fed would raise rates by 25 basis points, as officials did in February, or by 50 basis points, as they did in December. Now, investors are more interested in the question of whether the Fed will raise rates next week.

The S&P 500, up 0.4% in 2023, gave back almost all of its gains from the beginning of the year after a series of stronger-than-expected economic data were released. Government bond yields tumbled after rising for much of the year, reflecting a sudden rush to safe assets in the market.

Inflation remains on fire. The Labor Department said Tuesday that the consumer price index rose 6 percent in February from a year ago. Although price pressures have cooled for eight straight months, inflation remains well above the Federal Reserve's 2% target. Last week's jobs report told a similar story: The U.S. added 311,000 jobs in February, more than economists expected, but down sharply from the 517,000 jobs in January.

Sam Stovall, chief investment strategist at CFRA, told the Wall Street Journal, "Things have gotten very different recently, and now we really need to talk about things that could adversely affect the economy, the markets and our portfolios."

The market turmoil began last Thursday when shares of SVB Financial Group, the parent company of Silicon Valley Bank, plunged 60 percent amid a run on deposits. The stock did not open for trading Friday, and the bank was seized by the Federal Deposit Insurance Corp. that morning and is now exploring various possibilities to sell its assets.

Silvergate Capital Corp. and Signature Bank, two of the largest banks serving cryptocurrency companies, have also collapsed in recent days.

Regional bank stock prices plummeted but bounced back after government officials took steps to limit the impact. On Tuesday, Moody Investor Services cut its outlook on the U.S. banking system, citing a "rapidly deteriorating business environment. The ratings firm put the credit ratings of six U.S. banks on a review list for possible downgrades.

Credit Suisse's stock and bond prices plunged Wednesday after European regulators contacted it about its financial exposure to troubled Silicon Valley banks.

Moody said further rate hikes could worsen the bank's problems. Futures traders see a continuation of the 0.25 percentage point rate hike or no rate hike next week as fairly likely.

Investors remain wary of signs of contagion, with strategists at JPMorgan Chase Bank warning Monday that losses in the bond market could put pressure on other asset classes, such as commercial real estate, private equity and venture capital.

Futures traders said, "When the economy slows and financing costs rise, all of these implicit or explicit arbitrage trades are forced to close out, leading to the end of the cycle."

Investors seeking safe assets led to a frenzy of trading: As of Monday, the yield on two-year U.S. Treasuries posted the biggest three-day drop since 1987. Yields on longer-dated Treasuries also fell sharply. When bond prices rise, bond yields fall.

This rise in Treasuries came after short-term bond yields had risen steadily in the previous month.

Speaking with the Wall Street Journal, Thomas Martin, a portfolio manager at Globalt Investments, likened the sudden change in market sentiment to "like suddenly you get a slap in the face."

According to Quantitative Brokers, liquidity in the 10-year U.S. Treasury futures market is now less than half of what it was before the Silicon Valley bank collapse. Declining liquidity means that one particular trade could have a greater impact on market prices.

The disruption has spread beyond the bond market. The S&P 500 fell 4.5 percent last week, its worst week of performance this year. After a brief respite, the index plunged again on Wednesday, falling 1.7% in early trading.

The KBW Bank Index has fallen 22% in the past week. On Monday, Wall Street's fear gauge, the Cboe Volatility Index, reached its highest level in months. Put options on all stocks and exchange-traded funds traded at record highs on Friday, according to Cboe Global Markets. And bitcoin prices soared.

Investors are worried that a credit scare could discourage regional banks from lending to individuals and businesses, and that could lead to a contraction in the economy. The Russell 2000 index, which tracks smaller companies, has fallen 7.8% in the past week.

The shock has investors waiting for signals about how it could affect the Fed's long-term plans and reassessing the contents of their portfolios.

Mr. Hill told the Wall Street Journal, "We're taking a close look at the assets we own, looking for opportunities, and possible problems."

Some investors and strategists remain bullish on the market, provided the credit crisis subsides soon and the Federal Reserve finally decides to suspend interest rate hikes.

CFRA's Mr. Stovall told the Wall Street Journal that his year-end price target for the S&P 500 is 4360, about 10% above current levels.