For now, bad news is good for the stock market.
Investors judged that the latest weak economic reports would make it more likely that the Federal Reserve would continue to stimulate the economy and support a rally on Wall Street.
On Monday, the Institute for Supply Management said that a measure of United States manufacturing fell in May to its lowest level since June 2009 as overseas economies slumped and weak business spending reduced new factory orders.
The index of manufacturing activity fell to 49 last month, from 50.7 in April. That is the lowest level in nearly four years and the first time the index has dipped below 50 since November. A reading under 50 indicates contraction.
That helped convince investors that the Fed would not slow its $85 billion bond-buying program. Speculation that the central bank was ready to ease that stimulus program, a major impetus for this year’s rally in stocks, has caused trading to become volatile in the last two weeks.
The Standard Poor’s 500-stock index fell in the morning after the manufacturing report was published at 10 a.m. It moved between gains and losses for much of the day, then climbed decisively in the last hour of trading.
The good-news-is-bad-news interpretation of economic reports may support stocks in the short term, but the economy has to keep improving for stocks to reach new highs, said Alec Young, a global equity strategist at SP Capital IQ.
“This was a big miss on the I.S.M. report,” Mr. Young said. “Regardless of what it means for the Fed, ultimately you’re buying a stream of earnings and you want to see the economy doing well.”
Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, helped allay investors’ concerns that the central bank was poised to stop the stimulus. He told Bloomberg Television on Monday that Fed officials remained committed to the stimulus program.
Manufacturing has struggled this year as nations with weak economies have slowed imports from the United States. Europe remains in a recession and is buying fewer American goods. In the first three months of the year, American exports to Europe fell 8 percent compared with the same period a year ago.
Businesses have also reduced the pace of investment in areas like equipment and computer software. A gauge of new orders fell to 48.8, its lowest level in nearly a year. Production and employment also declined.
A separate report on Monday said a measure of Chinese manufacturing dropped last month to 49.2, from 50.4 in April. As with the institute’s index, a reading below 50 indicates contraction. The figure added to signs that a resurgence of China’s economy, the world’s second largest after the United States, might be losing momentum.
The S. P. 500-stock index climbed 9.68 points. to 1,640.42, up 0.59 percent. The Dow Jones industrial average rose 138.46 points, to 15,254.03, a gain of 0.92 percent. The Dow got a lift from Merck, which rose nearly 4 percent.
The Nasdaq composite index, which is heavily weighted with technology stocks, rose 9.45 points, to 3,465.37, an increase of 0.27 percent.
The yield on the 10-year Treasury note barely changed from late Friday, closing at 2.13 percent, with the benchmark up 1/32, to 96 20/32. The yield climbed as high as 2.17 percent in early trading, then fell as low as 2.09 percent after the manufacturing report was released.
Despite the advance Monday, signs are emerging that this year’s rally may be starting to falter. The S. P. 500 index closed higher for a seventh straight month in May, but the index also logged its first back-to-back weekly declines since November. On Friday, the Dow plunged 208 points, its worst drop in six weeks. The Dow is still up 16.4 percent this year, and the S. P. 500 is 15 percent higher.
Article source: http://www.nytimes.com/2013/06/04/business/daily-stock-market-activity.html?partner=rss&emc=rss
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