Stocks started out higher on Monday in response to the news that Congressional leaders and the White House had reached a deal to raise the debt ceiling. (As of this writing, the plan still has to be voted on by the House and Senate, and the outcome is not certain.) But the good mood didn’t last long in the face of a disappointing ISM manufacturing report for July. The overall index came in at 50.9%, just barely ahead of the 50% demarcation line between growth and contraction; the reading was down from 55.3% in June and well below the 54.5% expected by economists for last month. The production and employment measures still indicated growth in July, but at a slower pace than in June. The new orders index came in at 49.2%, indicating contraction. There was a little better news from the Commerce Department’s report that construction spending rose a larger than expected 0.2% in June from a May level that was revised higher. But investors were focused on the ISM report, which suggests that in July the economy didn’t pick up much if any steam after the unacceptably slow growth of the first half of the year. We’ll get additional important data on July’s economic activity with Wednesday’s ISM non-manufacturing report and Friday’s employment report.
In a volatile session that saw it up as much as 15 points and down as much as 17, the S&P 500 closed with a loss of 5 points or 0.4%. Nasdaq had a similar loss, while the Dow closed just about unchanged. The rally in Treasury bonds, which seems somewhat out of proportion to the retreat in stocks, continued as the yield on the 10-year Treasury bonds fell by five basis points to 2.75%.
INVESTMENT OUTLOOK… Friday brought a disappointing advance report on second-quarter GDP, showing only 1.3% growth and downward revisions to prior quarter estimates. This was followed Monday by a disappointing report on July manufacturing activity. Clearly, the rate of job creation remains the number one factor in how robust the second-half economic expansion will be, and to date the initial claims reports have not been the breakout data people are waiting for. Going forward, however, we expect U.S. firms to continue to generate positive sales and earnings, particularly if economic activity emerges from the current soft patch later this year. Resolving the debt ceiling uncertainty would probably give the market a boost – at least until the ugly details of unwinding a decade of exploding U.S. Treasury debt start to be revealed.
Copyright © 2011 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.