Stocks Surge, Then Give Back Many Gains

By: CBS/AP (Posted by Josh Mabry)
By: CBS/AP (Posted by Josh Mabry)

NEW YORK (AP/CBS NEWS)-- News of an increase in American factory activity sent stocks roaring higher out of the gate Monday, only to pare their gains at the close.

The Dow Jones industrial average ended the day up 65 points, or 0.4 percent, to 14,974. The blue-chip index had been up as many as 173 points earlier in the session. The Standard & Poor's 500 index rose 8 points, or 0.5 percent, to 1,614. The Nasdaq composite rose 31 points, or .9 percent, to 3,434, its fifth straight day of gains. The Dow and S&P marked their fourth day of winning sessions out of the last five.

U.S. manufacturing grew modestly in June after a pickup in new orders and stronger production, according to a private survey. The Institute for Supply Management said its factory index increased to 50.9 in June from 49 in the previous month.

But in the convoluted logic of current stock market thinking, the exuberance was due less to the gain in manufacturing than to how small the gain was, and to weakness in the jobs picture. That suggests that the economy still isn't growing fast enough for the Federal Reserve to cut back on its stimulus program.

The Standard & Poor's 500 index logged its first monthly decline since October last month after investors were unsettled by comments from Federal Reserve Chairman Ben Bernanke. Bernanke said in late May that the Fed planned to ease back on its stimulus this year and end it next year, providing the economy continues to recover.

"The market has maybe stepped back from the knee-jerk reaction that the Fed news provided," said Jim Russell, a regional investment director at US Bank. "The manufacturing ISM number came in strong enough: not too hot, not too cold."

If the manufacturing report had been stronger, Russell said, stocks might have fallen as investors speculated that the Fed would be inclined to ease back on its stimulus sooner.

Other economists noted that the world economy appears stalled.

"The manufacturing operating environment is almost identical to what it has been for most of the last year, with no signs of improvement or deterioration," said Michael Montgomery, an economist at IHS Global Insight. "Similar conditions of near stagnation exist overseas, with Europe on the underwater side of neutral but clawing back toward neutral, China just under neutral, and only Japan showing any signs of a recovery that is gaining momentum. Worldwide manufacturing is stuck in the mud."

The Fed is currently buying $85 billion of bonds a month to keep interest rates low and encourage borrowing and spending. That stimulus has been a major factor supporting a rally in stocks this year. Despite last month's loss, the S&P 500 is still up 13.7 percent this year.

Jim O'Sullivan, chief U.S. economist with High Frequency Economics, said the latest manufacturing numbers should not affect investor expectations on whether the Federal Reserve will start tapering its monthly bond purchases in September, as many analysts predict. The more important gauge for Fed officials will come Friday, when the U.S. Labor Department releases data on job growth for June.

Nine of the 10 industry groups that make up the S&P 500 index rose, led by materials companies, a category that includes miners and chemical makers. Utilities were the only group to decline.

U.S. stocks also followed global markets higher. Japan's Nikkei 225 rose 1.3 percent, boosted by signs of improvement in Japan's economy.

In Europe, stock indexes rose after a mixed set of economic indicators for the region. While unemployment in the 17 countries that use the euro rose to another record high in May, manufacturing picked up in Britain, France and Italy and stabilized in Spain.

Germany's DAX index rose 0.6 percent and Britain's FTSE 100 index climbed 1.5 percent.

The yield on the 10-year Treasury note fell nearly 2 percent percent to 2.48 percent Friday. The note's yield surged to 2.66 percent last Monday as investors worried that the Fed was poised to reduce on its bond purchases. The yield on the 10-year Treasury note is used to set interest rates on many kinds of loans including home mortgages.

In commodities trading, the price of oil climbed $1.28, or 1.3 percent, to $97.83 a barrel. Gold rose $15.20, or 1.2 percent, to $1,238 an ounce.

Trading will be curtailed this week due to the Independence Day holiday Thursday. The New York Stock Exchange will close at 1 p.m. on Wednesday and reopen on Friday.

The dollar edged lower against the euro and rose against the Japanese yen.
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