Stock Market Suffers Worst Month Since Feb. 2009

Updated at 4:09 p.m. EDT

Stocks closed out their worst month in more than a year by sliding again on more unsettling news about Europe.

The Dow Jones industrials were down 122.36 points at closing Friday after Spain suffered the second downgrade of its credit rating in a month. The rating agency's action was another reminder to traders of the long-term economic problems still facing several European countries, and ultimately, the rest of the continent and the global economy as well.

Fitch cut Spain's rating by one notch, saying the country's plan to cut its budget will likely slow economic growth. Mounting debt forced Spain, among other European countries, to recently impose austerity measures to try and contain its rising deficit.

The rating agency also cited the recent bailout of a regional bank by Spain's central bank as a sign that the country's economic recovery will lag. Earlier this month, Standard & Poor's lowered its rating of Spain's debt. Greece and Portugal have also suffered downgrades.

Stocks were already down before the news about Spain broke in early afternoon. They fluctuated as the day wore on.

"People are worried about Europe and we're seeing a knee-jerk reaction, particularly ahead of a long weekend," said Joe Heider, a principal at Rehmann in Cleveland. He said traders won't want to be holding some investments since U.S. markets are closed Monday, while European ones are open.

Heider noted that the new rating, just one short of Fitch's highest, is still quite good. It was more the timing of the cut before the holiday weekend than the actual downgrade itself that surprised investors, he said.

The last trading day of May fit the pattern of the rest of the month. May was difficult for the market as persistent and intensifying worries about Europe's debt problems sent the Dow down about 7 percent. The average was heading toward its worst monthly performance since February 2009, the month before stocks began their recovery from 12-year lows. The Dow also looked to have its biggest May drop since 1962.

Throughout May, stocks have been tracking the euro, the currency shared by 16 European nations and that has become a gauge of confidence for Europe's economy. The euro hit a four-year low and was down as much as 9 percent during the month. The euro fell modestly again Friday, dropping to $1.2301.

The Dow Jones industrial average closed at 10,136.63, a drop of 122.36 points, or 1.19 percent. The Standard & Poor's 500 index fell 13.65, or 1.24 percent, to 1,089.41, while the Nasdaq composite index dropped 20.64, or 0.91 percent, to 2,257.04.

About two stocks fell for every one that rose on the New York Stock Exchange. Many traders were on vacation, and the resulting low volume helped skew prices.

The problems in Europe have led investors to ignore continuing signs of improvement in the U.S. economy. The fear in the market is that forced cutbacks in government spending in Europe in the coming months will curb the continent's economic growth, and in turn, the U.S. recovery.

Next week will bring a series of economic reports that will test the market, including the Labor Department's May employment report and readings on manufacturing, consumer spending and housing.

If there are any signs that the U.S. economy is being affected by news of Europe's problems - for example, if consumers seemed to be spending less - investors are likely to start selling again. And if the jobs report is disappointing, the market is also likely to suffer.

A report Friday showed that the U.S. recovery might be slowing a bit. The Commerce Department said consumer spending was flat in April, compared with the previous month. Economists polled by Thomson Reuters had forecast spending would rise 0.3 percent. It was the first time in seven months that spending had not risen in a month, indicating that consumers are still somewhat tentative about the health of the economy.

Personal income rose 0.4 percent, slightly worse than the 0.5 percent growth forecast by economists.

"This month was damaging to the psychology of investors, so consumption may taper in the near term," said Jamie Cox, managing director at Harris Financial Group in Richmond, Va.

Cox said consumers are more tentative after last year's market drop and recession, so they are more likely to cut back quickly at any signs of economic weakness. Investors, particularly retail investors, are also more likely to sell stocks at the first sign of a pullback, he said.

"We're not far enough removed from the 2009 drop," Cox said. "People are saying 'not again."'

A measure of consumer confidence was revised slightly higher. The Reuters/University of Michigan consumer sentiment index rose to 73.6 from a preliminary May reading of 73.3. Still the index is at nearly the same level it was three months ago.

The Chicago Purchasing Managers Index, a measure of manufacturing activity in the Midwest, fell to 59.7 in May from 63.8 last month. Economists had forecast the index would fall to 62.

With investors pulling out of stocks, bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.29 percent from 3.36 percent late Thursday.

The Russell 200 index of smaller companies fell 6.19, or 0.9 percent, to 664.32.

Overseas, Britain's FTSE 100 fell 0.1 percent, Germany's DAX index was down less than 0.1 percent, and France's CAC-40 fell 0.3 percent. Japan's Nikkei stock average rose 1.3 percent.