MarketView for August 1

Summary  

It was another day of red ink for the markets with the S&P 500 down for a sixth day on Monday as the government bickers over a theoretically agreed to bill  that will allow the nation to avoid default. After early gains, resulting from the compromise in Congress, the major equity indexes tanked in response to the decline in manufacturing. The Institute for Supply Management said the manufacturing sector grew at its slowest pace in two years during the month of July. The ISM report followed similarly weak reports from much of Asia and Europe.

Healthcare stocks felt the heat after the Centers for Medicare & Medicaid Services said Friday that it will cut payments to skilled nursing facilities by 11 percent. Kindred Healthcare fell 30 percent and Skilled Healthcare lost more than 43 percent.

The S&P 500 rallied back above its 200-day after dipping sharply below that. The level has acted as strong support over the last two months and the fact that S&P 500 was able to rally back above it was of some comfort.

Stocks traded in a wide range. A rally in equity markets that began in Asia last night on optimism over the debt agreement eroded as the outcome seemed to struggle throughout Monday to bring the deal to a close. Even though a default was considered unlikely by many investors, the threat of a credit rating downgrade continued to weigh on sentiment after Wall Street marked its worst week in a year last week.

Trading volume was in excess of the daily average with 8.3 billion shares changing hands on the major exchanges, well above the daily average of around 7.48 billion.

Manufacturing Growth Falters

The growth in manufacturing has faltered due to a lack of new orders and is now performing at its slowest pace in nearly two years in July. According to a report by The Institute for Supply Management that was released on Monday, the ISM’s index of national factory activity fell to 50.9 from 55.3 in June, resulting in a number that is the lowest since July 2009. Economists had expected a reading of 54.9. A reading below 50 indicates contraction in manufacturing.

The economy almost ground to a halt in the first half of the year, government data showed on Friday, with output growing at a tepid a 1.3 percent annual pace in the second quarter after advancing just 0.4 percent in the prior period. This ISM report makes a case for the much-anticipated increase in economic activity during the second half may not materialize to the degree hoped for and counted on.

Manufacturing, which accounts for about 12 percent of gross domestic product, was held back by weak new orders, whose index fell to 49.2 from -- the lowest in two years, from 51.6 in June. Prices paid index fell to 59 from 68, while the employment index fell to 53.5 from 59.9.

Meanwhile, a separate report released by the Commerce Department indicated that construction spending increased by 0.2 percent to an annual rate of $772.32 billion. May's construction spending was revised to a 0.3 percent increase rather than the previously reported 0.6 percent decline. Overall construction spending fell 4.7 percent from a year ago.

Private construction spending rose 0.8 percent to a seven-month high as an increase in nonresidential outlays offset a second straight month of declines in spending on residential projects.

Spending on public construction projects dropped 0.7 percent to $278.91 billion, the lowest level since March 2007. The decline reflected weak spending on federal projects, which dropped 2.2 percent. State and local government spending fell 0.6 percent to the lowest level since November 2006.

Could Retail Sales Be Improving

It is possible that the nation’s retailers will report higher sales for the month of July. However, July is also considered to be a “discount” month, which means that profit margins may not enjoy similar gains. Nonetheless, July sales figures will give economists an early read on demand at the start of the back-to-school season, the second-largest selling season of the year after Christmas. The back-to-school selling season has important implications as consumer spending accounts for about 70 percent of the economy, which barely grew in the first half of 2011.

It is not uncommon for retailers to offer discounts in July as they try to clear store shelves for back-to-school merchandise. The question is whether the degree of discounting was greater than usual and would therefore reduce profit margins.

Retail chains will report closely watched same store sales, meaning sales at stores open at least year, on Wednesday and Thursday. The word on the Street is that sales could show a 4.1 percent rise for July, compared with a year-earlier increase of 2.8 percent, according to Thomson Reuter’s data. At issue is whether retailers will be able to sell their wares at full price in the back-to-school season.

Look for club operators such as Costco and BJ's to post some of the largest sales gains in July. Warehouse clubs, which charge customers an annual fee to shop in their stores, attract shoppers desiring low prices on necessities such as groceries or toiletries. Off-price retailers such as TJX and Ross are also expected to do well. Off-price stores sell sharply discounted designer merchandise often returned to vendors by department stores. And July is expected to be strong for luxury chains such as Saks and Nordstrom because of the purchasing power of higher-income shoppers.

One underperformer of the month could be clothing retailer Gap.. Same-store sales at the parent of the Gap, Old Navy and Banana Republic chains are expected to fall 0.7 percent, according to Thomson Reuters data.

Same-store sales reports capture only part of the retail economy. Industry leader Wal-Mart and other major retailers such as Best Buy and Amazon.com do not report monthly sales.