MarketView for July 1

Summary 

Wall Street began the third quarter and the second half of the year supported by signs of strength in the manufacturing and construction sectors. At the same time the major stock indexes pulled back from their session highs late in the day as investors sold some shares to book profits. Nonetheless, the gain by the S&P 500 index of 12.6 percent during the first six months of 2013, marked the strongest first half of the year since 1998 for that index.

Wall Street has shown signs of stabilization in the past week after a selloff that was triggered by concerns that the Federal Reserve's bond-buying policy, which has partly fueled this year's rally in equities, would end sooner than expected. June was the S&P 500's first negative month since October.

The day's early rally was bolstered by data from the Institute for Supply indicating that manufacturing activity grew in June, rebounding from an unexpected contraction in May. Construction spending neared a four-year high in May, according to the Commerce Department.

The S&P's best-performing sectors included non-cyclical consumer goods and services, industrials and technology. Shares of Procter & Gamble rose 1.3 percent to $78.02. Among the S&P 500's 10 industrial sectors, the telecom and utilities sectors were the decliners of the day.

The S&P financial index gained 0.5 percent. Citigroup rose 0.6 percent to $48.25 after the bank said it agreed to pay $968 million to settle claims that it left Fannie Mae on the hook for home loans the agency would not have knowingly guaranteed.

Netflix rose 6.3 percent to $224.28, and Apple was up 3.2 percent at $409.22. Both helped lift the Nasdaq. There was no obvious catalyst for the rally in Netflix shares although the company announced an exclusive multi-year streaming deal to provide "New Girl," a hit comedy on Fox, to customers. Earlier on Monday, Raymond James raised its recommendation on Apple's stock to "strong buy" from "outperform."

In corporate news, Jefferies & Co raised its price target on Tesla Motors' shares to $130 from $70, saying the electric car maker was on track to deliver 21,000 Model S cars in 2013. Tesla's stock ended the day up 9.2 percent to close at $117.18.

Onyx Pharmaceuticals ended the day up 51.3 percent to $131.33 after the company said it was considering selling itself, though it had rejected a roughly $10 billion bid from Amgen. In other pharmaceutical-related news, Insmed fell 18.7 percent to $9.72 after its experimental lung infection drug fared no better than a competing one developed by Novartis in a lung function test.

Shares of Zynga were sharply higher after it was rumored that the company was replacing its Chief Executive Mark Pincus with Microsoft executive Don Mattrick. Zynga ended the day up 10.4 percent to close at $3.07. Zynga said after the closing bell that Mattrick, who heads Microsoft's Xbox business, has been appointed to replace Pincus as CEO, effective July 8.

About 6 billion shares changed hands on the three major equity exchanges, a number that was slightly below the daily average this year of about 6.4 billion shares.

Construction Spending at Highest Level in 4 Years

The Commerce Department reported Monday morning that construction spending rose to its highest level in nearly four years during May, increasing 0.5 percent to an annual rate of $874.9 billion. A sharp rebound in public outlays offset a decline in investment in private nonresidential projects, pointing to moderate economic growth. The gain followed a revised 0.1 percent gain in April.

The construction sector is regaining some strength after collapsing during the recession, but the recovery remains slow as the commercial real estate market and factory construction is yet to pick up. The housing market is leading much of the recovery in construction.

In the first quarter, growth in spending on nonresidential structures contracted for the first time in two years.

Construction spending in May was lifted by a 1.8 percent rise in public construction projects, the biggest rise in nearly a year, after two straight months of declines. Public construction spending in May touched its highest level since November last year.

Outlays on federal government projects rose 0.6 percent, advancing for a second straight month. State and local spending, which is far larger than federal projects, jumped 1.9 percent to a six-month high.

Spending on private construction projects was flat. Residential construction spending increased 1.2 percent to its highest level since October 2008. Spending had dipped 0.1 percent in April, and part of the increase in May was due to renovations, which do not go into the calculation of GDP.

Spending on private nonresidential structures fell 1.4 percent in May after three straight months of gains.

Factory Activity Shows Small Gain

Manufacturing activity grew in June behind a pickup in new orders, exports and production. According to the latest report by the Institute for Supply Management, the ISM index of factory activity increased to 50.9 in June. That's up from 49 in May, which was the lowest reading in four years. A reading above 50 suggests growth, while those below indicate contraction.

Still, a measure of manufacturing employment fell in June to 48.7, its lowest level since September 2009. That suggests Friday's June employment report will show factories cut jobs for the fourth straight month.

Manufacturing has slowed this year after providing crucial support to the economy for the first three years after the recession ended in June 2009. Europe's slump has weighed heavily on exports. And businesses cut back on their investment in machinery and equipment in the first quarter. A measure of export orders rose to 54.5 from 51, most likely in response to a degree of growth in Japan and the EU.

A report in Europe showed improvement in manufacturing activity in Britain, France and Italy and stabilization in Spain. And large manufacturers in Japan reported a positive outlook for the first time in nearly two years. The quarterly "tankan" survey showed that the outlook for services firms also increased. The stronger readings indicate that businesses are pleased with Prime Minister Shinzo Abe's efforts to revive the nation's stagnant economy.

Still, China's manufacturing sector weakened in June, according to two separate surveys. Factories there were hurt by falling orders from the U.S. and Europe and by Chinese regulators' efforts to slow lending.

Stocks have rebounded and the yield on the 10-year note has declined since the middle

The Commerce Department reported that consumers also spent more in May on cars and trucks, which should keep auto factories humming. Sales at auto dealers rose in May by the most in six months, according to the Department.

At the same time, the economy expanded at a rate of only 1.8 percent during the first three months of the year, the Commerce Department reported, much slower than its previous estimate of a 2.4 percent rate. The main reason for the drop was consumers spent less on services than initially thought. Spending on long-lasting factory goods, such as cars and appliances, was stronger.

Going forward, economic growth remained tepid in the April-June quarter. Most estimates range between a rate of 1.5 percent and 2 percent.