Stocks Surge in Response to Positive Economic Reports

The month of June started out with a bang for the stock market in response to the release of positive economic reports. Some investors, however, fear that the month, historically not a good month for stocks, will end poorly. The upticks in the market on Monday defied signs that the economy is not out of trouble yet, like rising interest rates and the fourth largest bankruptcy in US history. Investors on Monday were responding to better than expected results in manufacturing, consumer activity, and construction starts. The Dow and other major markets gained more than 2%, and both the S&P 500 and Nasdaq reached their highest levels of the year.

Even though these numbers indicate a slowing in the economy’s decline, they are indicative of a complete rebound. Construction spending was slightly higher in April, though personal spending dipped. Personal income remained steady while manufacturing declined in May for the 16th month in a row, though at a slightly slower rate General Motors filed Chapter 11 bankruptcy on Monday, the fourth largest company to do so in our nation’s history. Though certainly not a shock, the filing did serve to remind us that the government is now very involved in corporate America, having recently taken over AIG and the mortgage companies Freddie Mac and Fannie Mae.

Elsewhere, Treasuries continued their decline in value and better than expected economic data caused the dollar’s value to drop. In contrast to a week ago, the rise in long term interest rates did not impact the market, though economists still fear the economic recovery could be hindered by the rising rates.

As the rally in the stock market approaches its fourth month, many analyst fear that the jump has been too quick since 12 year lows were reached in March. The S7P enjoyed its quickest recovery since the ’30s.

Analysts are worried that even though the economy appears to be stabilizing, there will be nothing to increase demand when the market hits bottom.

Analysts indicated that several technical factors were also partially responsible for Monday’s gains. The 1st day of trade in a given month typically sees new capital come in from mutual funds, hence the Dow and S&P both surpassed 200 day moving averages for the 1st time in more than a year. Moving averages are monitored closely and many investors buy or sell depending on whether they are reached.

The Dow gained more than 220 points, over 2.5% to close at its highest level since early January. Its losses for the year are down to 55 ponts, or less than 1%. The Dow announced it will drop GM after their bankruptcy filing, and Citigroup as well, since it is also partially a government owned company. Those 2 companies will be replaced on the market by Travelers Cos. And Cisco Systems sometime next week.

The S&P 500 gained almost 24 points or 2.5%, while the Nasdaq rose more than 3%, or just over 54 points.
Some analysts have noted that the market’s patterns have been eerily similar to last year’s, declining through the middle of March, then climbing back up through the end of May. The bad news is that the market fell back down again last June. The average movement over the last 20 years for the month of June has been a .5% decline.

Top economists are predicting the economy to hit bottom in late summer or early fall, then go through a tedious recovery. The nations gross domestic product is expected to fall this year by a little more than 3%, while European nations and Japan suffer even bigger drops.

Also presenting an obstacle to a recovery is expected 2nd quarter coporate earnings. Should they be even worse than expected, the market could be impacted significantly.
Government-issued bonds declined once again, pushing yields close to last week’s high levels. The yield on a 10 year Treasury climbed to 3.69% from 3.45% on Friday. This number is commonly used as a benchmark for many consumer loans such as home mortgages.

The dollar was weaker on Monday against the euro as well as the British pound. Gold lost ground, while oil was slightly up.

Stocks gaining value outnumbered declining stocks by a 5 to 1 ratio on the NYSE. Trading was heavy, at 6.2 billion shares, compared to Friday’s 5.85 billion.

The Russel 2000 index of small companies rose almost 20 ponts, or 4%. Internationally, Japan’s Nikkei gained 1.5%, Hong Kong’s Hang Seng gained 4%, Britain’s FTSE 100 gained 2%, Germany’s Dax rose 4%, and France’s CAC-40 climbed 3%.