Stocks ended a disappointing January with a loss as investors questioned whether the economy will be able to sustain its big fourth-quarter growth rate. Downbeat earnings at technology companies also pulled stocks down.
The Dow Jones industrials fell 53 points Friday to close the month with a loss of 3.4 percent although just 10 days earlier, the average reached a 15-month high. Investors who are increasingly uneasy about the economy, earnings and politics have been pulling money out of the market over the past week.
Many market watchers believe January sets the tone for stocks for the rest of the year. And historical data backs that up. Since 1950, the Standard & Poor's 500's full-year direction has matched its January performance more than 90 percent of the time, according to the Stock Trader's Almanac.
Still the January barometer, as some call it, isn't fool-proof. Last year, when the market had its worst January ever, the Dow fell 11.4 percent for the month, and then went on to post an 18.8 percent gain for all of 2009.
Stocks initially rose Friday after the Commerce Department said the gross domestic product, the broadest measure of the economy, expanded at an annual rate of 5.7 percent during the fourth quarter, easily topping forecasts of 4.5 percent. The strong GDP growth, coupled with an upbeat report on manufacturing in the Midwest, reassured investors that the economy is continuing its recovery.
However, the GDP numbers also raised questions about the sustainability of a recovery. Most of the growth came from companies replenishing low inventories. Rebuilding inventories tends to create just a temporary bump in economic growth.
"The GDP report looks shiny and new on the surface," said Alan Gayle, senior investment strategist for RidgeWorth Investments. "But once you open up the hood, you start to see it's not as great as on the outside."
Michael Sheldon, chief market strategist at RDM Financial Group said the report "is going to leave doubts" in the minds of investors who are looking for consistent economic improvement.
Questions about the recovery just add another concern to market that has halted a 10-month rally. Investors were already uneasy after China said it was trying to limit its economic growth and President Barack Obama announced plans for a major overhaul of banking regulations. Shares have fallen sharply since hitting a 15-month high last week.
The Dow fell 53.13, or 0.5 percent, Friday to 10,067.33. The Dow is now down 658.10, or 6.1 percent, since reaching its 15-month high of 10,725.43 on Jan. 19.
The S&P 500 index fell 10.66, or 1 percent, to 1,073.87, while the Nasdaq composite index fell 31.65, or 1.5 percent, to 2,147.35, lagging the other indicators following a disappointing earnings report from Microsoft Corp.
For the month, the S&P 500 is down 3.7 percent, while the Nasdaq is off 5.4 percent.
Unlike most Januarys, there wasn't a flood of fresh money moving into the market this month, since so much cash went into last year's big rally, said Alan Gayle, senior investment strategist for RidgeWorth Investments. Without that injection of money, portfolio managers are left to collect profits from last year's big run, he said.
And the recent spate of bad news and uncertainty helped many professional investors decide the best course of action was to sell.
"The market is in the process of recalibrating," Gayle said. "We will get some retrenchment."
There was good economic news Friday, but not enough for the market to hold its gains. The Chicago Purchasing Managers Index rose more than expected, providing some evidence the manufacturing sector, at least in the Midwest, is rebounding as well. The Chicago PMI climbed to 61.5 in January from 58.7 last month. Economists were expecting a reading of 57.5 for January.
The Chicago report is seen as a precursor to the national Institute for Supply Management report due out Monday.
The market is still wary about government plans to increase the regulation of banks. Obama's calls last week to restrict the size of banks and to limit risky trading by big financial institutions helped spark the sell-off in stocks. Since first announcing the plan, Obama has provided few specifics about how far the restrictions would go in limiting bank trading.
"Political uncertainty always gets people nervous," said Peter Zuger, co-portfolio manager of the Touchstone Mid Cap Value fund.
The unknowns coming out of Washington have helped stall the rally that sent the S&P 500 up 60.3 percent since last March. But one political worry was put to rest Thursday when Federal Reserve Chairman Ben Bernanke won Senate confirmation for a second term.
Declining stocks outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.58 billion shares.
Fourth-quarter earnings reports continued, and extended the pattern of mixed results among the companies that have already reported.
Microsoft said late Thursday it beat analysts' expectations, but the company reported slow spending on software by corporations. Analysts say companies can no longer get by just beating expectations; they need to show revenue growth and signs of future strengthening.
The company's stock fell 98 cents, or 3.4 percent, to $28.18.
Bond prices edged higher Friday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.61 percent from 3.64 percent late Thursday.
The dollar rose against other major currencies, while gold prices fell.
The Russell 2000 index of smaller companies fell 5.89, or 1 percent, to 602.04.
Overseas markets were mixed. Asian stocks stumbled on disappointing company forecasts and Toyota's recall of millions of cars, while Europe's major indexes rose following a report that showed inflation remained relatively benign in the 16 countries that use the euro and the strong U.S. GDP report.
Japan's Nikkei stock fell 2.1 percent, while Hong Kong's Hang Seng dropped 1.2 percent. Britain's FTSE 100 rose 0.8 percent, Germany's DAX index gained 1.2 percent, and France's CAC-40 climbed 1.4 percent.