U.S. stocks end lower, S&P 500 drops third straight week as Fed worries linger

What drove markets

Stocks slipped after two days of selling sparked by the Federal Reserve projecting its policy interest rate would remain above 5% well into next year.

The notion in markets that the Fed would be cutting rates soon was “offsides,” leading to a “knee-jerk reaction” in bond markets that hurt stocks, said Michael Skordeles, head of U.S. economics at Truist Advisory Services, in a phone interview Friday. In his view, the central bank may cut its benchmark rate just once in the second half of next year, if at all, as inflation remains too high in a “resilient” U.S. economy with a “still fairly strong” labor market.

Rapidly rising Treasury yields have been blamed for much of the pain in stocks. The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
climbed 11.7 basis points this week to 4.438%, dipping on Friday after on Thursday rising to its highest level since October 2007, according to Dow Jones Market Data.

Senior Fed officials who spoke Friday voiced support for the more aggressive monetary policy path signaled by Fed Chair Jerome Powell on Wednesday.

Boston Federal Reserve President Susan Collins said rates are likely to stay “higher, and for longer, than previous projections had suggested,” while Fed Gov. Michelle Bowman said it’s possible the Fed could raise rates further to quell inflation. The latest Fed “dot plot,” released following the close of the central bank’s two-day policy meeting on Wednesday, showed senior Fed officials expect to raise rates once more in 2023.

Meanwhile, the S&P 500 finished Friday logging a third straight week of declines, with consumer-discretionary stocks posting the worst weekly performance among the index’s 11 sectors by dropping more than 6%, according to FactSet data.

“Markets weakened this week following an extended period of calm, as the hawkish tone adopted by Fed Chair Powell following the FOMC meeting caused the decline,” said Mark Hackett, Nationwide’s chief of investment research, in emailed comments Friday. “Bears have wrestled control of the equity markets from bulls.”

Economic data on Friday showed some weakness in the U.S. services sector, while manufacturing activity recovered slightly but remained in contraction, according to S&P U.S. purchasing managers indexes.

Still the U.S. economy has been largely resilient despite a hawkish Fed, with “strong economic growth driving fears of continued inflation pressure,” said Hackett. He also pointed to concerns that a “too strong” economy and “developing clouds” such as strikes, a potential government shutdown, and student loan repayments “will impact consumer activity.”

Read: Government shutdown: Analysts warn of ‘perhaps a long one lasting into the winter’

Jamie Cox, managing partner at Richmond, Virginia-based wealth-management firm Harris Financial Group, said by phone on Friday that he’ll become concerned about the impact of a government shutdown on markets if it stretches for longer than a month.

“I’m only worried if it goes past a month,” said Cox, explaining he expects “little” economic impact if a government shutdown lasts a couple weeks.

Meanwhile, United Auto Workers President Shawn Fain said Friday that the union is expanding its strike to 38 General Motors Co.
GM,
-0.40%
and Stellantis NV’s
STLA,
+0.10%
auto-parts distribution centers in 20 states, hobbling the two carmakers’ repair network.

“We’re seeing strike after strike,” which overtime could fuel wage growth that’s already “robust,” said Truist’s Skordeles. That risks adding to inflationary pressures in the economy, he said. And while U.S. inflation has eased “dramatically,” said Skordeles, “it isn’t down to where it needs to be.”

Companies in focus

• Activision Blizzard Inc.
  ATVI,
  +1.70%
  rose 1.7% after the U.K. Competition and Markets Authority said that Microsoft Corp.’s
  MSFT,
  -0.79%
  revised proposals to modify its Activision acquisition makes it possible for the $75 billion deal to be cleared. Under the revised deal, Activision would sell cloud-gaming rights to French videogame publisher Ubisoft Entertainment SA
  UBI,
  +4.47%,
  whose shares rose in Paris.

• Chinese stocks including e-commerce group Alibaba Group Holding Limited
  BABA,
  +4.98%,
  electric vehicle-maker NIO Inc.
  NIO,
  +0.95%
  and e-commerce platform JD.com Inc.
  JD,
  +2.01%
  ended Friday with gains. Reports suggested Friday that China is considering a relaxation of rules that limit foreign ownership of publicly traded firms.

Steve Goldstein contributed to this report.