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The Dow Jones Industrial Average reversed early gains to close down on Friday, September 29, as Treasury Secretary Janet Yellen sounded alarms over an impending government shutdown. House Speaker Kevin McCarthy is reportedly seeking a stopgap spending bill to avert a closure after legislative defeats. Meanwhile, new inflation data showed price pressures continue to moderate, a positive sign for the economy.

The Dow fell 0.4%, giving up a morning rally to end near session lows at 33,339. The S&P 500 slid 0.2% after rising early on, closing at 4,246. The tech-heavy Nasdaq held a slight 0.2% gain, finishing at 12,112 as Apple and other giants edged up.

Volume was lighter on the NYSE but higher on the Nasdaq versus Thursday’s levels. Small caps outperformed with a 0.6% gain on the Russell 2000. But the Innovator IBD 50 ETF (FFTY) tracking top growth stocks erased an early advance to close slightly lower.

Inflation Moderates as PCE Index Cools

A key inflation report showed ongoing signs of cooling price pressures. The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, increased 0.4% in August compared to 0.2% in July.

The August reading came in just below economists’ consensus forecast of a 0.5% monthly rise. On an annual basis, PCE inflation moderated to 3.5% from 3.3% in July, matching expectations.

Excluding volatile food and energy categories, the Fed-watched core PCE index edged up 0.1% in August versus 0.2% the prior month. That brought the year-over-year core inflation rate down to 3.9% from 4.3% in July, moving closer to the central bank’s 2% target.

The inflation data aligns with the Fed’s outlook for steadily decelerating price pressures in the second half of 2022. Moderating PCE inflation, along with mixed housing data and sluggish consumer spending, supports the case for smaller interest rate hikes going forward.

Yellen Warns of Disruption From Government Shutdown

However, dark clouds loom from the political standoff over federal spending. Treasury Secretary Janet Yellen, in prepared Congressional testimony released Friday, warned that a shutdown starting October 1 absent new appropriations bills would disrupt several key government functions.

Yellen stressed that a funding lapse would require furloughing workers, suspending financial system supervision, and curtailing critical services. House Speaker Kevin McCarthy is reportedly planning stopgap legislation to temporarily extend current funding levels and avert an imminent closure.

But passing even a short-term spending patch faces challenges given opposition from some hardline House conservatives. Lawmakers have made little progress toward full-year appropriations since the new Congress convened in January. The high stakes fiscal stare-down threatens to undermine economic and market optimism.

Stocks Pushing Lower as Leadership Wanes

The major averages opened higher Friday but slid into the red amid the renewed shutdown worries and tentative market action. The S&P 500 and Nasdaq both managed to pare losses into the close. But leading stocks showed weakness, with the Innovator IBD 50 ETF losing its early rise.

Lackluster trading volume also signaled limited conviction. NYSE decliners led advancers by a nearly 2-to-1 margin. The Russell 2000 small cap index remained a bright spot, building on recent gains.

Hot inflation readings over the summer sparked worries of restrictive Fed rate hikes triggering a recession. But cooling inflation signals the central bank’s moves to tighten policy are working. While risks remain, moderating prices support a soft landing outlook.

Still, headwinds from high interest rates and Europe’s energy crisis point to uneven market progress. The major indexes confirmed a new uptrend earlier in September. But their recent stall calls for defensive tactics focused on leading stocks exhibiting robust relative strength.

Among the Dow Jones stocks, Nike (NKE) rose over 7% after beating earnings views late Thursday. But shares erased most gains, closing under the 50-day line as apparel demand slows. Tech leaders Apple (AAPL) and Intel (INTC) posted modest advances. But the Dow’s retreat reflects its lack of market leadership.

Key Movers: Tesla, Carnival, Synopsys

Some stocks delivered powerful individual action despite the indexes’ midday fade. Tesla (TSLA) gained 1% ahead of its third quarter delivery figures due Saturday. Analysts expect the electric vehicle pioneer to report over 460,000 vehicles delivered, down slightly from Q2’s record. Tesla stock is shaping a potential handle entry.

But cruise operator Carnival (CCL) plunged 8% as margin pressures outweighed better-than-expected quarterly revenues. Software icons Atlassian (TEAM) and CrowdStrike (CRWD) rallied in above-average volume. Chip gear maker Synopsys (SNPS) extended its rebound, regaining its 50-day line.

Among other leaders, Pan American Silver (PAAS) jumped 5% in fast trade after joining the Nasdaq-100 Index. And recent breakouts Vertex Pharmaceuticals (VRTX) and Neurocrine Biosciences (NBIX) added to gains.

But the market’s unstable backdrop points to selectivity in buying breakouts. Investors should focus on stocks holding key support and exhibiting solid relative strength. Reviewing the IBD 50 and Sector Leaders list can uncover potential leaders to monitor.

While risks abound, the cooling inflation outlook offers encouragement. But the unresolved spending showdown in Washington threatens to check economic progress. Markets face cross-currents between lessening price pressures and policy uncertainty.

Yet pockets of market strength persist, as seen in standout stocks shrugging off index weakness. Maintaining flexible tactics and targeting leaders with robust institutional demand can help navigate through unpredictable conditions.

The coming weeks may see volatility persist until concrete signs emerge of the Fed pausing its aggressive tightening campaign. But for disciplined investors focused on chart action and sector rotations, opportunities in leading stocks look likely to continue.