Market Snapshot: U.S. stocks turn lower as weak consumer sentiment report reignites recession fears

What’s driving markets

U.S. stocks started Friday’s session with modest gains as shares of beaten-down regional banks recovered, while shares of technology companies benefiting from the artificial intelligence craze also contributed to gains.

However, the main indexes turned lower in mid-morning trade following the release of the University of Michigan’s gauge of consumer sentiment, which fell to a preliminary May reading of 57.7, down from an April reading of 63.5. That is the lowest level since November last year.

Economists polled by the Wall Street Journal had expected a May reading of 63.

“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.

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

Regional banks had struggled Thursday with PacWest Bancorp
PACW,
-1.60%
reporting a big drop in deposits for the week ending May 5, but the sector got a boost after data released after Thursday’s close showed that usage of both the Federal Reserve’s discount window and its new facility allowing banks to borrow against bonds was little changed.

However, the SPDR S&P Regional Banking ETF
KRE,
-0.64%,
a gauge of performance of regional-banking stocks, fell again by midmorning Friday, surrendering earlier gains, 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 November 2021.

Economic reports like this are contributing to an increasingly dour outlook for the U.S. economy, which is underscoring a sense of uncertainty that has helped keep a lid on stocks, market analysts said.

The uncertain outlook for Congress to raise the debt ceiling was another factor 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 standoff: Here’s what could go into a bipartisan deal

Beyond that, the outlook for Federal Reserve monetary policy also seems unclear, as more Fed officials voice support for more interest-rate hikes, even after Fed Chairman Jerome Powell hinted at a pause.

While many economists have said the U.S. April consumer price inflation data has showed enough progress on reducing price pressures to justify the central bank holding interest rates steady for the rest of the year, Fed Gov. Michelle Bowman signaled early Friday that she was not on-board with that view.

“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 during a phone interview with MarketWatch.

Companies in focus

• News Corp
  NWSA,
  +5.38%,
  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 sharply higher.

• Tesla Inc. shares
  TSLA,
  -1.67%
  advanced 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.