MarketView for August 3

Summary  

Yes, after a trying morning, you finally saw the red ink turn to black with regard to the major equity indexes. The result was that the S&P 500 index broke a seven-day losing streak, but worries about the economy kept the Street from making a strong commitment to equities, as the markets remained volatile. Trading was the busiest since mid-March, with 10.5 billion shares changing hands on the major equity exchanges, well above the daily average of around 7.48 billion shares, as the S&P dipped to a new low for 2011 before chalking up a higher finish.

Driving the early losses was data showing the pace of growth in the services sector fell in July to its lowest since February 2010, while new factory orders fell in June, pulled down by weak demand for transportation equipment.

Technology shares gained after days of hefty selling that briefly pushed the Nasdaq into negative territory for 2011 before the composite index ended with solid gains. Nonetheless, the soothsayers of doom were quick to predict the day’s gains as a short-term rebound after the S&P's 6.8 percent decline over the past seven days.

However, it is correct that the recent consumer spending numbers and factory activity statistics underline the economy's precarious position after a weak first half of the year. That, along with the festering European debt crisis, will keep many on the sidelines.

Helping the Nasdaq, Research In Motion rose 4.9 percent to close at $25.33 after unveiling two new and powerful versions of its touchscreen BlackBerry Torch, including an all-touch model, as it seeks to regain ground lost to Apple and Google.

MasterCard rose 13.4 percent to $338.47 after the company reported second-quarter profit that rose 33 percent.

Some of the day’s enthusiasm was the result of comments from former Federal Reserve Vice Chairman Donald Kohn, who told the Wall Street Journal the Fed could consider a new round of stimulus to help the economy.

Service Sector Growth Abominable

The pace of growth in the services sector fell unexpectedly in July to the lowest level since February 2010 and the number of jobs created by the private sector also slowed, reports showed on Wednesday. The bottom line is that the services data showed an economy that is going to be swimming upstream as it tries to rebound in the second half of the year after a very weak first half. While the weakness in the first months of the year had been attributed to temporary factors such as a jump in oil prices and the impact from Japan's massive earthquake in March, signals of a pickup have so far been elusive.

Furthermore, the economy could face a further drag from the budget deficit cutting plan approved by Congress recently, although cuts in spending will be phased in gradually.

The Institute for Supply Management said its services sector index fell to 52.7 last month from 53.3 in June. though it was still above the 50 figure that indicates expansion in the sector. The new orders gauge slipped to 51.7 from 53.6, while employment fell to 52.5 from 54.1. The ISM report echoed earlier global data that showed the euro zone's service sector grew at its weakest pace in nearly two years, while China's sector grew at its slowest in three months.

ISM's manufacturing report on Monday showed the sector also grew at its slowest rate in two years last month. Government data on Wednesday showed new orders received by factories fell in June, pulled down by weak demand for transportation equipment.

The Commerce Department reported that orders for manufactured goods fell 0.8 percent after a revised 0.6 percent increase in May. Earlier on Wednesday the ADP National Employment Report showed employers added 114,000 jobs in July, coming in modestly above expectations, but still fewer than the month before. Economists had anticipated a gain of 100,000 jobs. June's private payrolls were revised down to an increase of 145,000 from the previously reported 157,000.

Also on the labor market front, planned layoffs at U.S. firms jumped to a 16-month high in July as sectors which had been seeing fairly few layoffs unexpectedly bled jobs. Employers announced 66,414 planned job cuts last month, up 60.3 percent from 41,432 in June, according to a report from consultants Challenger, Gray & Christmas.

Layoffs in the pharmaceutical and retail sectors overtook nonprofit and government job cuts last month. Job cuts at Merck, Borders, Cisco Systems, Lockheed Martin and Boston Scientific accounted for 57 percent of the July total, according to Challenger, making July the first month in seven in which the government sector did not shed the most jobs.

A round of data on the housing market gave a mixed picture of the sector. Home prices rose in June for a third straight month but were still down compared to a year earlier in a continued hangover from the expiration of last year's tax credit, according to data analysis company CoreLogic.

At the same time, a separate report showed applications for home mortgages rose last week as interest rates fell. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 7.1 percent in the week ended July 29.