Dow, S&P 500 book back-to-back weekly losses, as poor consumer sentiment report reignites recession fears

What drove markets

U.S. stocks finished down Friday after a gauge of consumer sentiment fell, with all three major benchmarks giving up modest gains seen after the opening bell.

The University of Michigan’s index of consumer sentiment dropped to 57.7 in May based on a preliminary reading, from 63.5 in April. That’s the lowest level since November and below an expected May reading of 63 by economists polled by The Wall Street Journal.

The numbers in the University of Michigan’s survey “stink,” said Steve Sosnick, chief strategist at Interactive Brokers, in a phone interview Friday. The findings are “not market-friendly.”

Consumers’ inflation expectations over the next five years rose to 3.2%, from 3% in April. That’s the highest reading since 2011.

Inflation is “not coming down fast enough for people’s taste,” said Sosnick. Also, “economic and political rhetoric has been so dreary that it can’t help sentiment,” he said pointing to concerns over the U.S. debt ceiling and worries about a slowing economy.

The S&P 500’s 11 sectors closed mixed Friday, with consumer discretionary seeing the worst performance in booking a 0.9% decline, according to FactSet data. The utilities sector had the best performance Friday, rising a modest 0.4%.

See: Consumer sentiment sours in May on renewed worries about the U.S. economy, debt ceiling

“It was those Michigan numbers that set us up on the downside,” said Joe Saluzzi, co-head of equity trading at Themis Trading, during a phone interview with MarketWatch.

“In this case, bad news was bad news,” Saluzzi said, a reference to the fact that U.S. stocks sometimes rally on downbeat economic data because it signals that the Federal Reserve’s interest-rate hikes are having their intended effect.

“Now, you’re getting numbers that investors aren’t happy with,” he added.

Two of the three major U.S. stock benchmarks booked weekly declines Friday. The Dow Jones Industrial Average fell 1.1% for the week, while the S&P 500 shed 0.3% and the Nasdaq Composite saw a weekly 0.4% gain, according to FactSet data.

Stocks have been weighed down by economic worries and the recent “banking stress is tied in with that,” according to Kevin Gordon, senior investment strategist at Charles Schwab.

While the S&P 500 and the technology-heavy Nasdaq Composite are up so far this year, their gains have been driven by megacap companies, Gordon said in a phone interview Friday. “If you take away the biggest names” in those indexes, he said, the “performance is pretty weak.”

Read: The S&P 500 is top-heavy with tech. Here’s what that says about future stock-market returns.

Regional banks had struggled Thursday, with PacWest Bancorp
PACW,
-2.99%
reporting a big drop in deposits for the week ending May 5. The SPDR S&P Regional Banking ETF
KRE,
+0.64%
ended Friday with a 0.6% gain, after dropping 2.5% on Thursday, according to FactSet data.

Investors have digested a raft of disappointing economic data in recent weeks, including Thursday’s weekly jobless claims report, which showed applications for unemployment benefits in the U.S. rose to their highest level since October 2021.

Meanwhile, the uncertain outlook for Congress to raise the debt ceiling was weighing on investors’ minds, analysts said, as a meeting between President Joe Biden and top Congressional leaders was delayed until next week amid signs that staff negotiations were progressing.

See: Debt-ceiling meetings ‘productive’ as Biden, leaders set to reconvene next week: White House

Also read: Here’s where investors may turn to ‘hide’ as U.S. debt-ceiling deadline looms based on 2011 market reaction

Beyond that, the outlook for Federal Reserve monetary policy also seems unclear.

Fed Gov. Michelle Bowman signaled early Friday that she was not on-board with the view that April inflation data from the consumer-price index showed enough progress on reducing price pressures to justify the central bank keeping interest rates steady for the rest of the year.

“In my view, the most recent CPI and employment reports have not provided consistent evidence that inflation is on a downward path, and I will continue to closely monitor the incoming data as I consider the appropriate stance of monetary policy going into our June meeting,” Bowman said in a speech at a European Central Bank conference in Frankfurt.

“There’s so much uncertainty out there with these markets,” said Mark Arbeter, president of Arbeter Investments, during a phone interview.

Despite the latest move lower, U.S. stocks remained mired in a tight range that has held for most of the year. It would take a break above 4,200 on the S&P 500 index to signal that a sustainable bull market might be in the offing, Arbeter said.

Companies in focus

• News Corp.
  NWSA,
  +8.48%,
  the parent of MarketWatch publisher Dow Jones, reported fiscal third-quarter results that beat expectations, helped by a “decidedly more positive” economic backdrop, sending shares 8.5% higher.

• Tesla Inc. shares
  TSLA,
  -2.38%
  fell 2.4% after Chief Executive Elon Musk tweeted Thursday that he had hired a new CEO for his other company, Twitter. “She will be starting in ~6 weeks!” Musk said, without naming her, adding he’ll transition to executive chair and chief technology officer.

—Steve Goldstein contributed to this article.