By 
U.S. stocks saw early gains fizzle Friday, with the S&P 500 index down sharply in the afternoon after attempting to build on a bounce in the previous session that marked what’s been called one of the craziest market days in history.
Stocks turned lower after a closely watched survey showed consumer inflation expectations were on the rise, while investors were also weighing a round of results from big Wall Street banks as earnings reporting season gets under way.
How stock indexes are trading
The Dow Jones Industrial Average
DJIA,
-1.36%
fell almost 264 points, or 0.9%, to around 29,775, after rising 390 points at its session high.
The S&P 500
SPX,
-2.23%
was down 62 points, or 1.7%, at 3,607.
The Nasdaq Composite declined 234 points, or 2.2%, to almost 10,415.
On Thursday, the Dow erased a plunge of nearly 550 points to end 828 points higher, while the S&P 500 bounced back from a loss of more than 2% to end 2.6% higher, and the Nasdaq Composite jumped 2.2%. The Dow’s 2.8% rise was the largest one-day gain since Nov. 9, 2020.
See: Why stocks scored a historic bounce after another hot inflation report
What’s driving markets
Inflation concerns were weighing on markets Friday afternoon.
Gains early Friday gave way to losses after the University of Michigan’s consumer sentiment survey showed expectations for inflation over the next year rose to 5.1% from September’s one-year low of 4.7%, while expectations for inflation over the next 5 years ticked up to 2.9% from 2.7% last month.
“That’s definitely a negative for markets,” said Dave Grecsek, Aspiriant’s managing director in investment strategy and research, in a phone interview Friday. “If we continue to see more increases in inflation expectations, that’s a very concerning development for the Fed,” which has been battling the surging cost of living with aggressive interest rate hikes, he said.
“Once people expect higher inflation, it becomes much more entrenched and it affects behavior,” said Grecsek. “People start purchasing more today because they feel like prices are only going to get higher tomorrow,” making the Fed’s job “a lot harder.”
The stock market was also being weighed down by Thursday’s consumer-price-index report, which showed inflation rose in September more than anticipated, according to Grecsek. Equities initially tanked Thursday before staging a rally likely fueled by technical drivers such as “short covering,” he said, as the “fundamental information” from the CPI report was “poor” in that it indicated stickier inflation.
“It’s possible that prior to the widely feared CPI report, investors hedged their portfolios and scrambled to cover their shorts when the market dropped on the bad news,” Yardeni Research said in a note Thursday. “That forced unhedged shorts to cover too, resulting in a reversal day.”
Rick Rieder, the chief investment officer for fixed income at BlackRock, told MarketWatch that Thursday’s gyrations marked one of the “craziest” days in market history, coming after data showing U.S. September inflation running at a hotter-than-expected pace.
Analysts have cited a number of factors to explain the huge bounce in stocks on Thursday, including technical and positioning considerations after a steep selloff that had seen the S&P 500 index tumble for six straight sessions to end Wednesday at its lowest since November 2020.
“Among the most frequent explanations is that the most pessimistic of all possible scenarios were built into prices: a 75-point rate hike at the next two meetings,” said Alex Kuptsikevich, senior market analyst at FxPro, in a note. “After this, market participants turned their attention to substantial discounts to prices from their highs with a relatively healthy economy that continues to create jobs and raise wages.”
But caution still prevailed on Friday.
“Despite October’s notoriety as a ‘bear market killer’ and an auspicious intraday move, investors should maintain a certain degree of caution. A real change in trend requires a shift in fundamentals. And those changes are still not easy to identify,” Kuptsikevich said.
BlackRock’s Rieder advised investors to consider parking their money in short-term bonds, a point recently echoed by hedge-fund legend Ray Dalio.
“One of the largest intraday reversals in recent memory off a closely watched CPI print underscores the oversold condition and sentiment extreme in this market. The vulnerability wasn’t in the number, the vulnerability was in the positioning leading up to the number,” said Jeff deGraaf, founder of Renaissance Macro Research, in a Friday note.
As for the University of Michigan survey, “the uptick in inflation expectations probably is a response to the increase in gas prices in recent weeks, in which case it won’t continue,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note, observing that preliminary readings tend to see big revisions.
“Still, on the heels of the September inflation data this rebound — reversing the drop last month — does not look good, given how closely policy makers appear to track the measure,” Shepherdson said.
The Fed needs to continue raising interest rates but should be careful about the pace of these moves, Kansas City Fed President Esther George said on Friday.
Meanwhile, the University of Michigan survey’s gauge of consumer sentiment rose to 59.8 in October from 58.6. Economists were expecting a reading of 59, according to a Wall Street Journal poll.
In other economic data released Friday, a U.S. Census Bureau report showed retail sales were unchanged in September, coming in below forecasts for a 0.3% rise. Excluding autos, sales rose 0.3%.
Investors were also weighing earnings results from Wall Street banks, including JPMorgan Chase & Co., Wells Fargo & Co.
WFC,
+2.61%,
Morgan Stanley
MS,
-5.27%
and Citigroup Inc.
C,
+0.72%.
Shares of JPMorgan
JPM,
+1.98%
were up 2.6% after the bank and Dow component beat Wall Street targets for earnings and revenue.
See: JPMorgan profit falls but beats estimates while Wells Fargo misses
Also read: Treasury’s Yellen worried about ‘loss of adequate liquidity’ in U.S. government bond market
Companies in focus
Wells Fargo
WFC,
+2.61%
shares rose 3.1% after the bank posted stronger-than-expected revenue for the third quarter, offsetting a profit miss.
Shares of Morgan Stanley
MS,
-5.27%
fell 3.6% after the investment bank missed Wall Street’s targets for earnings and revenue amid a drop in deal activity.
Citigroup
C,
+0.72%
shares rose 1.4% after the bank topped Wall Street forecasts on earnings and revenue.
UnitedHealth Group Inc.
UNH,
+0.72%
shares were up 1.1% after the Dow component and health insurer reported third-quarter profit and revenue that rose above expectations, and lifted its full-year outlook for a third-straight quarter.
Kroger Co.
KR,
-8.25%
announced a $24.6 billion deal to buy Albertsons Cos. Inc.
ACI,
-7.37%.
Under the terms of the merger agreement, Kroger will acquire all of the shares outstanding of Albertsons’ common and preferred stock for an estimated $34.10 per share. Kroger shares fell 6.1%, while Albertsons was off 7.9%. Shares of Albertsons jumped more than 11% Thursday on reports of a potential deal, while Kroger rose 2%.
Beyond Meat Inc.
BYND,
-8.12%
shares fell 5.4% after the plant-based food company issued a revenue warning, announced a plan to cut about 200 workers and said it’s cutting other costs as it makes a strategic shift aimed at achieving positive cash flow operations.
—Steve Goldstein contributed to this report.
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