U.S. stock markets closed lower on Friday, extending recent losses as investors grappled with a troubling mix of elevated energy prices and signs of economic deceleration. The technology-heavy Nasdaq Composite led the decline, dropping 0.91%, while the broader S&P 500 index retreated 0.38%. The Dow Jones Industrial Average showed relative resilience, edging down just 0.03%.
Economic Data Fuels Stagflation Concerns
The Commerce Department delivered disappointing revisions to economic growth figures, revealing that fourth-quarter GDP expanded at a mere 0.7% annualized rate. This marked a significant downward adjustment from the previously reported 1.4% estimate. Meanwhile, inflation remained stubbornly elevated, with the core Personal Consumption Expenditures price index—the Federal Reserve's preferred inflation gauge—registering a 3.1% year-over-year increase for January. Personal spending showed modest growth of 0.4% during the same month.
Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, noted in commentary that both economic momentum and labor market strength had begun to fade even before the escalation of Middle East tensions. Steve Sosnick, Chief Market Strategist at Interactive Brokers, offered a more pointed assessment: "Higher oil prices piling onto a slowing economy is not exactly a good combination."
Energy Markets and Geopolitical Tensions
Brent crude oil maintained its position above $100 per barrel, sustaining pressure on inflation expectations and corporate margins. The ongoing conflict involving Iran continues to threaten global energy supplies, with particular focus on potential disruptions to shipping through the Strait of Hormuz. Goldman Sachs analysts presented a range of scenarios, suggesting Brent could potentially decline to the low $70s later this year if supply disruptions ease. However, they warned that a two-month closure of the critical Strait of Hormuz could push fourth-quarter prices to $93 per barrel, significantly above their base case forecast of $71.
Shifting Rate Expectations
Market participants have substantially revised their outlook for Federal Reserve policy in recent weeks. Following similar moves by Goldman Sachs, Barclays now anticipates the first interest rate cut will occur in September. Data from LSEG reported by Reuters indicates traders now see only a single quarter-point reduction as likely before June 2027, reflecting diminished expectations for monetary policy easing.
Corporate Developments and Market Stress
Financial sector concerns emerged as Morgan Stanley restricted investor withdrawals from one of its private-credit funds following increased redemption requests. This action echoes similar moves recently implemented by both BlackRock and Blue Owl, highlighting growing stress within the private credit industry.
Individual stocks experienced significant volatility. Adobe shares plunged 6.4% despite the company reporting record first-quarter results and reaffirming full-year guidance. The decline followed news that CEO Shantanu Narayen will step down once a successor is identified. Ulta Beauty shares tumbled 11.8% after the retailer's quarterly earnings fell short of profit expectations.
Investor Sentiment and Flows
The pressure on equities has been building for weeks. U.S. equity funds experienced outflows of $7.77 billion during the week ended March 11, marking the second consecutive week of net redemptions. In contrast, bond funds attracted $8.21 billion in new investments as investors sought safer assets. Consumer sentiment deteriorated further, with the University of Michigan's preliminary March reading dropping to 55.5 from 56.6 in February, reaching a new low for the year as households cited higher gasoline prices and ongoing geopolitical concerns.
Looking Ahead to the Federal Reserve
All eyes now turn to the Federal Reserve's March 17-18 policy meeting. Market participants will scrutinize updated economic projections and policy statements for clues about how central bankers view the current environment. The key question is whether policymakers perceive the oil price shock as manageable within their existing framework or as a development that could derail anticipated rate cuts. The interplay between persistent inflation and slowing growth creates a complex challenge for monetary authorities navigating an increasingly uncertain economic landscape.
