The U.S. stock market ended a blockbuster quarter with a whimper.
Investors were spooked Friday after a dismal report showed manufacturing declining in the United States. Even though results of stress tests on Spanish banks offered some relief, concerns about slowing global growth kept investors on edge.
Still, U.S. stocks closed out the third quarter of 2012 posting strong gains: the Dow closed Friday up 4.3%, the S&P 500 gained 5.8%, and the Nasdaq rose 6.2%. Year-to-date, the gains are even more impressive: the Dow is up 10%, the S&P 500 is up 15% and the Nasdaq has surged 20%.
Can the rally continue into the fourth quarter? Dan Greenhaus, chief strategist at BTIG, said yes. But he cautioned that a lot depends on developments in Europe.
On Friday, stocks opened lower and the sell-off gained steam after the Chicago Purchasing Managers Index for September, a key gauge of manufacturing activity, came in far below expectations and showed a contracting economy for the first time since 2009.
The Chicago PMI report was yet another sign of ongoing weakness in the U.S. economy. The University of Michigan's consumer sentiment index for September also fell short of expectations.
Stocks bounced off their lows after the results of stress tests for Spanish banks were in line with expectations. But it seems investors are waiting for the next shoe to drop in Europe. Greece, which is seeking a two-year extension to comply with its bailout terms, is expected to release its 2013 budget Monday.
In Britain, a government recommendation was published Friday suggesting "a complete overhaul" of the interest rate benchmark Libor, following the recent scandal that exposed how banks rigged the rate for their own benefit.
European stocks closed lower. Britain's FTSE 100 shed 0.7%, while the DAX in Germany fell 1.1% and France's CAC 40 dropped 2.5%.
In Asia, Chinese investors continued to rally on the central bank's record injection of liquidity into money markets. The Shanghai Composite ended 1.5% higher, and the Hang Seng in Hong Kong rose 0.4%.
The first domestic report of the day showed personal income grew at 0.1% in August -- the same as July. Personal spending rose 0.5%, slightly higher than in July. Both are signs the recovery continues to struggle.
Meanwhile, the Bureau of Economic Analysis reported that core prices of household goods and services rose 0.1% in August, as expected.