S&P 500 suffers biggest monthly loss this year as U.S. stocks mostly drop after inflation reading

What drove markets

The S&P 500 finished modestly lower Friday in a fourth straight week of losses, after U.S. stocks climbed at the open following the latest inflation reading.

Investors have been “swinging back and forth” on whether the U.S. economy is in for a recession or a “soft landing” engineered at least in part by Federal Reserve interest-rate hikes to battle inflation, Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co., said in a phone interview Friday. “I think it’s a little bit foggy for investors to try to figure out the answer.”

The S&P 500 dropped 4.9% in September, its worst monthly performance since December, according to FactSet data.

“It was a tough month for stocks,” said Schutte.

Deterioration of breadth in the slumping U.S. stock market may have attracted some “dip buyers” on Friday morning, Liz Ann Sonders, chief investment strategist at Charles Schwab, said in a phone interview. In her view, the reading on inflation from the Federal Reserve’s preferred gauge before the market’s open on Friday wasn’t “a needle mover” for stocks, as there were no big surprises in the data.

The PCE, or personal-consumption expenditures, index showed that core prices, which exclude the volatile food and energy categories, rose 0.1% in August. That was a lower-than-expected increase, while the year-over-year inflation rate slowed to 3.9%.

But rising energy prices pushed upward on the headline PCE price index, which rose 0.4% in August, its biggest increase in seven months.

“Friday’s PCE on a core basis, which removes food and energy prices, suggests that inflation is continuing to decelerate, meaning the Fed’s aggressive campaign is working,” Carol Schleif, chief investment officer at BMO Family Office, said in emailed commentary. “The challenge is that core PCE remains almost double the Fed’s 2% target, prompting the Fed to keep the possibility of another rate hike in play.”

Meanwhile, Callie Cox, U.S. investment strategist at eToro, highlighted the decline in services inflation, which in August showed prices up 4.9% from 12 months earlier. A cool-down of services inflation “is what Powell and the Fed want to see as they near the end of rate hikes. Altogether, this report should bring bond yields back down to Earth,” she said in emailed commentary.

Higher long-term yields have heaped pressure on stocks.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
fell 2.4 basis points on Friday to 4.572%, although it remained near 16-year highs reached earlier this week, according to Dow Jones Market Data.

In other economic data on Friday, the Bureau of Economic Analysis estimated that personal income rose 0.4% in August while consumer spending also increased 0.4%.

There are signs of cooling consumer spending, according to Northwestern Mutual’s Schutte. On the services side of the economy, “you’re starting to see spending pull back,” he said.

Investors also received an update from the Chicago Business Barometer, which registered at 44.1 in September, representing its first drop in three months. Meanwhile, the University of Michigan consumer-sentiment index showed sentiment improving slightly at the end of September, with the final reading rising to 68.1 from 67.7 earlier in the month.

The University of Michigan data included a reading on inflation expectations, which showed respondents expected inflation to wane further to 3.2% in a year’s time.

Some analysts blamed Friday’s fading stock-market gains on funds’ repositioning of portfolios heading into the fourth quarter, which starts Monday.

“With this being the month- and quarter-end, there will be lots of repositioning today, which may mean lower stock prices later, given that we have been in a risk-off market environment for much of September,” said Fawad Razaqzada, market analyst at City Index and Forex.com, in emailed commentary. “In any event, volatility is here to stay.”

Stocks to watch

• Shares of Nike Inc.
  NKE,
  +6.68%,
  a component of the Dow Jones Industrial Average, rallied 6.7% after the athletic gear maker reported better-than-forecast earnings.

• Nike’s rivals, Adidas AG
  ADS,
  +6.22%
  and Puma SE
  PUM,
  +5.76%,
  saw their shares rise after their U.S. rival beat first-quarter earnings forecasts. Adidas rose 6.2% while Puma climbed 5.8%.

• Shares of Fisker Inc.
  FSR,
  +0.31%
  rose 0.3% after the electric-vehicle maker announced an intention to offer additional convertible debt to an existing institutional investor.

• Blue Apron Holdings Inc.‘s stock
  APRN,
  +134.52%
  soared 134.5% following the announcement of a deal under which the company will be acquired by a food-delivery startup. The deal will see the company exit public markets at a fraction of the valuation it fetched in its IPO.

• Walgreens Boots Alliance Inc. shares
  WBA,
  +6.41%
  jumped 6.4% following a lackluster session on Thursday.

• Shares of Tesla Inc.
  TSLA,
  +1.56%,
  the electric-car maker and member of the “Magnificent Seven” group of market-leading stocks, rose 1.6% ahead of delivery data expected next week.

Steve Goldstein contributed to this article.