NEW YORK (AP) - Stocks closed out their worst month in more than a year by sliding again on more unsettling news about Europe.
The Dow Jones industrials dropped 122 points Friday after Fitch Ratings gave Spain 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 perhaps the rest of the continent and the global economy as well.
May was difficult as persistent and intensifying worries about Europe's debt problems sent the Dow down 7.9 percent and the broader Standard & Poor's 500 index down 8.2 percent. Both indexes had their worst monthly performance since February 2009, the month before stocks began their recovery from 12-year lows. The Dow had its biggest May drop since 1962.
The Dow is down 9.5 percent from its 2010 high, reached April 26.
The Dow has regained some ground from the low of 9,974.45 it closed at on Wednesday.
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.
"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 market's reaction was an example of how quick investors have been to sell during May. Although the day didn't see the huge swings stocks had earlier this month - including the May 6 plunge that took the Dow to a loss of 1,000 points in less than 30 minutes - there was still plenty of emotion. Greece, the most troubled European country, has received a bailout and several companies are cutting their budgets to make it easier for them to pay their bills, but investors fear that the region's debt problems can't be contained. They're also worried that austerity measures will stifle economic growth, and that Europe's slowdown will become the world's slowdown.
The market's drop this month has given it what's called a "correction." That's considered a drop of 10 percent or more from a recent high. The S&P 500, the index most watched by market pros, ended May down 10.5 percent from its high for the year, reached April 23. The Dow is down 9.5 percent from its 2010 high, reached April 26. The Dow has regained some ground from the low of 9,974.45 it closed at on Wednesday.
On Friday, the Dow fell 122.36, or 1.2 percent, to 10,136.63. The S&P 500 index fell 13.65, or 1.2 percent, to 1,089.41, while the Nasdaq composite index dropped 20.64, or 0.9 percent, to 2,257.04.
The Russell 200 index of smaller companies fell 20.64, or 0.9 percent, to 661.61.
About two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.45 billion shares.
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 anxiety about Europe sent interest rates tumbling in May. Investors were buying U.S. government debt because of its reputation for safety. The yield on the 10-year Treasury note rose to around 3.70 percent at the beginning of the month, but then fell to a 2010 low of 3.07 percent this week. Since mortgage rates are tied to that note, mortgage rates fell to 4.78 percent, their lowest level since December when they touched a record low of 4.71 percent.
However, corporate borrowing rates rose, in particularly junk bond rates, as investors grew uneasy about company bonds. Barclays Capital's index that tracks high-yield U.S. corporate debt fell nearly 4 percent in May.
The problems in Europe led investors to ignore continuing signs of improvement in the U.S. economy during May. Investors' fear 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."'
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.