Stock prices edge higher on positive ISM survey

Down 130 points or 0.8% shortly after today’s opening bell, the Dow Jones Industrial Average fought its way back to a gain of 18 points or 0.1% Monday. NASDAQ, largely on today’s buying of biotech stocks (+1.8%), rose 0.3% for the day, and the S&P 500 split the difference between the Dow and NASDAQ, rising 0.2%. Given the way biotech stocks have flip-flopped between “risk-on” and “risk-off” as a sort of nexus in what has been a two-month market tug-of-war, today’s gains could easily become tomorrow’s losses. Since hitting its peak price level on February 25, the NASDAQ biotech index has, more often than not, experienced daily absolute changes (advances or declines) greater than one percentage point, with the bigger changes being declines, taking the index down 15% over the period.

Monday was also a day of moderate gains in technology shares and high flyers generally. Apple shares closed above $600 for the first time in 18 months, gaining 1.4%. Tesla rose 2.7%, but Twitter continued lower, closing at 38.75, the lowest level since its initial public offering last November. Among S&P 500 stocks, there were 267 advancers versus 228 decliners today, but within the S&P MidCaps and SmallCaps, decliners predominated. Sector leaders today were a mix of the defensive (utilities, up 0.8%; health care, up 0.6%) and cyclical (energy, +0.5%; materials, +0.4%), with technology stocks also rising a better-than-average 0.4%. Commodities prices were lower in the energy arena and fractionally higher for gold and silver.

Economic reports were mixed today, coming in better for the U.S. but missing expectations once again in China. HSBC’s manufacturing purchasing managers’ index for China stayed in contraction territory (i.e., below 50) for a fourth straight month, coming in at 48.1 for April and missing Street forecasts (48.4) and March’s level (48.3). In the U.S., the ISM non-manufacturing survey popped to 55.2 in April, two points better than March’s 53.1 and beating Street expectations centered on 54.0. The best part of today’s ISM survey was the jump in new orders to a seven-month high of 58.2. Surprisingly, though, the employment component of the non-manufacturing index dipped to 51.3 in April from 53.6 in March, although it remains in expansion territory. (Surprising, since it does not square with last Friday’s strong employment report.)

Two other reports of interest out today also appear to be contradictory. Research at the Atlanta Federal Reserve Bank finds that there may not be as much slack in the labor market as other indicators suggest; the Bank’s jobs calculator indicates that nonfarm payroll growth at the rate of the past three months, if extended for another six months (no mean feat), would put the U.S. at full employment at the end of that six-month period. At the other end of the forecast spectrum was bond guru Jeffrey Gundlach, speaking at the Ira Sohn hedge fund conference today, who predicted that housing starts are not going to see the 1.5 million annual rate that has been the average since 1970 again “in my lifetime.” Little wonder that stocks have been trading in a narrow range this year, alternating between risk-on and risk-off market action.

After hitting a six-month low of 2.57% this morning, the 10-year Treasury bond yield climbed to 2.61% after the release of the generally positive ISM service industries survey. Yields on 5- and 10-year Treasury notes rose two basis points on the day, 30-year T-bond yields climbed four bps from Friday’s 11-month low, and the long TIPS bond saw a five basis-point rise to 1.10%. The latter real yield is not asking much for lending out 30 years.

Reports/dates/facts/links to watch for over the next week:

  1. May 6: U.S. trade balance for March.
  2. May 7: U.S. productivity and unit labor costs for Q1 2014; MBA home purchase applications and mortgage refi’s (latest week); U.S. consumer credit for March.
  3. May 8: Same-store sales for U.S. chains (April); German industrial production (March).
  4. May 9: JOLTS job openings survey for March.

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

About wrightnetblogger

Senior Vice President – Investment Research/Economist
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