Stocks sidestep relief over debt deal

August 1, 2011

Stocks sank Monday after a dismal manufacturing report overshadowed relief over the debt-ceiling deal and refocused Wall Street’s attention on the faltering economic recovery.

The blue-chip Dow Jones industrial average ended the day down about 0.1 percent. The Standard & Poor’s 500-stock index, a broader measure of the market, and the Nasdaq composite index, heavy on technology stocks, each lost about 0.4 percent in Monday’s trading.

All three indexes began the day up more than 1 percent on news of the deal to raise the debt limit. But stocks quickly turned negative after the Arizona-based Institute for Supply Management released its read on the health of the manufacturing sector.

The ISM’s factory index, which measures the overall level of activity in the manufacturing sector, sank to 50.9, well below even the most pessimistic expectations and barely above the critical level of 50, which indicates the economy is in expansion. The last time the factory index registered that low was in July 2009, when many economists have said the recession ended.

Stocks’ swift U-turn indicated markets are “right back to trading off of fundamentals again,” said Omair Sharif, U.S. economist for RBS Securities in Stamford, Conn., “and those did not look that good” once the manufacturing figures came out.

Asian stocks fell early Tuesday on news of the U.S. manufacturing slowdown, Bloomberg News reported. Japan’s Nikkei 225 Stock Average slid 1.3 percent in morning trading, and stocks dropped in Seoul, Sydney and Hong Kong.

The manufacturing sector has been “one of the leaders of the recovery,” Sharif said, but now its role seems murkier and raises questions about when the economy will emerge from its soft patch of activity. “The soft patch seems to be more persistent,” Sharif said.

Manufacturing could be further hit by the debt deal, said Russell Price, senior economist at Ameriprise Financial in Detroit, because a significant chunk of its $2.1 trillion in spending cuts comes from the defense budget. Standard & Poor’s aerospace and defense index dropped 0.8 percent on the day’s trading, more than twice the broader market’s slide.

Investors also went back to buying safer investments after easing somewhat on news of the debt deal. Gold remained high, closing at $1,619. Yields on 10-year Treasury bonds sank to 2.75 percent, marking a new low for the year. A lower yield indicates investors are willing to accept a smaller return for the safety of holding government debt.

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