Stocks' rough week ends with a rally

U.S. stocks went on another dizzying ride Friday and worked their way back from an early-morning plunge to send the Standard & Poor's 500 index to its first gain in four days. It was just the latest swing in a frenetic week for markets around the world as investors recalibrated — again and again — how worried to be about a possible trade war and a more aggressive Federal Reserve.

When U.S. markets opened for trading, the S&P 500 sank as much as 1.1% to join a worldwide sell-off after President Trump doubled down on “trade war” talk. He took to Twitter to defend his Thursday promise to impose stiff tariffs on imports of steel and aluminum, saying that the United States is losing on trade with virtually every country and that “trade wars are good” and “easy to win.”

Investors had a different impression. Markets tumbled in Asia and Europe on fears that escalating retaliation between countries could choke off trade and the global economy. The president of the European Union's governing body suggested possible tariffs on blue jeans and motorcycles.

The S&P 500 trimmed its loss as the day went on; within hours, it was bouncing between gains and losses. It accelerated in the last half hour of trading and ended at 2,691.25, up 13.58 points, or 0.5%. The Dow Jones industrial average fell 70.92, or 0.3%, to 24,538.06. The Nasdaq composite climbed 77.31, or 1.1%, to 7,257.87.

Stocks pared their losses as investors questioned how far Trump will end up going, said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management.

“I view nearly every one of Trump's actions through a negotiation lens,” he said. “This was an anchor, an opening bid. I think the market senses some of that, and I would imagine that we will see some horse trading going on with what ultimately happens with these tariffs.”

The S&P 500 still ended the week with a loss of 2%, its third decline that severe in the last five weeks. Last year, the worst weekly loss was just 1.4%.

If a trade war does break out, it could threaten a key reason investors were optimistic about stocks coming into 2018: The global economy is finally strengthening in sync, which should lead to higher corporate profits.

Big U.S. companies rely heavily on global trade, and companies in the S&P 500 got 43% of their sales from outside the United States in 2016, according to S&P Dow Jones Indices. That means Apple and other big U.S. companies are dependent on customers not only in Peoria, Ill., but also Paris and Peru.

Stocks of smaller U.S. companies, which tend to do more of their business at home, performed much better than the rest of the market. The Russell 2000 index of small-cap stocks rose 25.78, or 1.7%, to 1,533.17.

The trade worries are piling onto a market that was already nervous. Concerns about the possibility of higher inflation and interest rates have rocked markets since the S&P 500 set its latest record high in late January.

Inflation has been low in the years following the Great Recession, but if it jumps, it could cause the Federal Reserve to raise short-term interest rates more sharply than investors expect. That could easily upset markets, which enjoyed a remarkably smooth ride last year.

The Fed's chairman, Jerome Powell, jolted markets Tuesday when he said he was feeling more optimistic about the U.S. economy. Some investors took that as a signal that the Fed may get more aggressive, which sent stocks down and Treasury yields up. Later in the week, though, Powell may have calmed some of the fears when he said he does not see inflation in wages “at a point of acceleration.”

Such a dance is typical when central banks are raising interest rates and “tightening” financial conditions, rather than easing them, Schutte said.

“When central banks ease, the goal is shock and awe, or — to use a football analogy — to throw the deep ball,” he said. “When they hike, it's three yards and a cloud of dust. They want to advance the ball gradually.”

The yield on the 10-year Treasury rose to 2.86% from 2.81%.

Friday’s biggest loss in the S&P 500 came from Foot Locker, which plunged 12.7% to $40.04 after it said sales trends were weaker last quarter than analysts expected.

McDonald's stock dropped 4.8% to $148.27 on fears that its value menu isn't drumming up much in sales, and an analyst at RBC Capital Markets cut his expectations for the chain's sales in the United States.

Gap jumped 7.8% to $34.18 after the clothing retailer posted better-than-expected quarterly results. Sales growth at its Old Navy chain was especially strong, but its Gap and Banana Republic brands also beat expectations.

Microsemi climbed 4.7% to $67.30 after the Aliso Viejo company agreed to be bought by Microchip Technology for $68.78 a share, or more than $8 billion.

Markets overseas dropped sharply Friday. In Asia, Japan's Nikkei 225 plunged 2.5%, the Hang Seng in Hong Kong dropped 1.5% and South Korea's Kospi fell 1%.

In Europe, France's CAC 40 sank 2.4%, and Germany's DAX slid 2.3%. The FTSE 100 in London dropped 1.5%.

In the commodities markets, benchmark U.S. crude rose 26 cents to settle at $61.25 a barrel. Brent crude, the international standard, rose 54 cents to $64.37 a barrel.

Gold rose $18.20 to settle at $1,323.40 an ounce. Gold usually rises when investors are feeling more nervous about inflation and the economy. Silver rose 19 cents to $16.47 an ounce. Copper rose 2 cents to $3.12 a pound.

Natural gas was virtually flat at $2.70 per 1,000 cubic feet. Heating oil slipped a cent to $1.88 a gallon. Wholesale gasoline rose a penny to $1.90 a gallon.

The dollar fell to 105.54 yen from 106.24 yen. The euro rose to $1.2331 from $1.2255. The British pound rose to $1.3790 from $1.3768.


UPDATES:

1:50 p.m.: This article was updated with closing prices, context and analyst comment.

1:20 p.m.: This article was updated with the close of markets.

11:25 a.m.: This article was updated with more recent market figures, context and analyst comment.

8:35 a.m.: This article was updated with market figures and context.

This article was originally published at 7 a.m.

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