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The S&P 500 posted its first May advance in four years. However, mounting concerns about the Fed's QE exit strategy combined with technical factors shook Wall Street's seemingly unrelenting confidence and ignited a steep selloff Friday.

Today's Markets

The Dow Jones Industrial Average tumbled 209 points, or 1.4%, to 15116, the S&P 500 fell 23.7 points, or 1.4%, to 1631 and the Nasdaq Composite declined 35.4 points, or 1%, to 3456.

The old adage "sell in May and go away" seemed to have little effect on Wall Street for most of this month. The broad S&P 500 climbed 2.1%, the Dow added 1.9% and the Nasdaq rallied 3.8%. Still, those gains were trimmed dramatically by the heavy selling seen on Friday. 

Losses were heavy across the board. Health-care, energy, materials and consumer staple stocks took the steepest falls. Utilities and technology companies generally fared the best. Volatility, as tracked by the CBOE's VIX, surged 12.2% on the day in a sign of the rising tension. 

With no apparent headline driving the late-day rout, traders pointed to technical factors and mounting jitters for the decline. Doreen Mogavero, a long-time New York Stock Exchange floor trader, pointed to the re-balancing of the MSCI indexes as sparking intense volatility. Indeed, Credit Suisse said the rebalancing could result in $19 billion in trading, according to a report by Reuters. 

"With opinions so polarized even the bulls are cautious going into a weekend  and a rebalancing," Mogavero wrote in an e-mail. 

Traders Eye U.S. Economy, Fed QE Exit Plans

Improvements across the U.S. economy -- from the labor market to housing -- coupled with generally upbeat corporate earnings helped drive the charge higher in may. Still, anxiety has swelled toward the end of the month that as the economic picture brightens, the Federal Reserve may be forced to take its foot off the economic accelerator. 

On Friday, the Commerce Department said consumer spending fell 0.2% in April from March, the first decline since May 2012. Economists were expecting an increase of 0.1%. Personal income was unchanged for the month, compared to expectations of a 0.1% advance.

Goldman Sachs (GS) sliced its estimate for how much the U.S. economy will expand in the second quarter by 0.2 percentage point to 1.8% on the back of the disappointing data. 

Balancing that out, however, a reading on consumer sentiment from Thomson Reuters and the University of Michigan came in at 84.5 in late May, up from 83.7 earlier in the month, and besting economists’ expectations that it would hold steady. The gauge is now at its highest level since July 2007. Joseph Song, an economist at Nomura, added that the mix of economic news received by consumers was more favorable in May than any time in the last decade. 

"If households choose to put their money where their mouth is, we should see stronger consumer spending in the next few months," Song wrote in a note to clients. 

The Institute for Supply Management-Chicago’s PMI gauge jumped to 58.7 in May from 49.0 the month before, whizzing by economists’ forecasts of 50. Readings above 50 point to expansion in the Midwest manufacturing sector, while those below indicate contraction.The more closely-watched national ISM report is due out next week. 

In commodities, oil prices sold off. The Organization of Petroleum Exporting Countries said it will hold its production quota at 30 million barrels a day, broadly matching expectations. The benchmark U.S. contract skidded $1.64, or 1.8%, to $91.97 a barrel. Wholesale New York Harbor gasoline tumbled 1.2% to $2.779 a gallon. Gold slumped $19, or 1.4%, to $1,393 a troy ounce. 

On the corporate front, Dell (DELL) filed a proxy with the Securities and Exchange Commission, once again urging shareholders to vote for a go-private plan by founder Michael Dell and private-equity player Silver Lake Partners. 

Foreign Markets

The Euro Stoxx 50 fell 0.7% to 2780, the English FTSE 100 sold off by 0.91% to 6596 and the German DAX slumped 0.7% to 8342. 

In Asia, the Japanese Nikkei 225 rebounded 1.4% to 13775 and the Chinese Hang Seng tilted lower by 0.41% to 22392. 

 

Victoria Craig contributed to this report. 

Follow Adam Samson on Twitter @adamsamson.