U.S. Stocks Slump, Erasing Rally After ISM-Manufacturing Report

Photographer: Scott Eells/Bloomberg

Traders work on the floor of the New York Stock Exchange (NYSE) in New York on July 29, 2011. Close

Traders work on the floor of the New York Stock Exchange (NYSE) in New York on July 29, 2011.

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Photographer: Scott Eells/Bloomberg

Traders work on the floor of the New York Stock Exchange (NYSE) in New York on July 29, 2011.

U.S. stocks fell, sending the Standard & Poor’s 500 Index down for a sixth day, as slower- than-forecast growth in manufacturing erased a rally triggered by speculation lawmakers will raise the debt ceiling.

Health-care stocks fell 2.5 percent, the most among 10 groups in the S&P 500, after Medicare announced an 11.1 percent rate cut for next year. The S&P 500 Financials Index (S5FINL) dropped 0.6 percent, reversing an early gain, which had been driven by optimism that lawmakers would race to push through a compromise to raise the U.S. debt limit by at least $2.1 trillion and slash government spending by $2.4 trillion or more.

The S&P 500 lost 1.2 percent to 1,277.38 at 11:55 a.m. in New York after climbing as much as 1.2 percent earlier. The benchmark gauge’s losing streak is the longest since June 8. The Dow Jones Industrial Average retreated 130.10 points, or 1.1 percent, to 12,013.14 today after rising 139 points.

“It’s just a reality check,” said Peter Kenny, a managing director in institutional sales at Knight Capital Group Inc. in Jersey City, New Jersey. The ISM report “confirms an outlook with real contraction characteristics. The budget assumptions may be simply too optimistic. The debt deal may not be enough. The economy is slowing. This is a real problem for any deal the way it is currently structured.”

Photographer: Richard Drew/AP

Traders work on the floor of the New York Stock Exchange on July 29, 2011. Close

Traders work on the floor of the New York Stock Exchange on July 29, 2011.

Close
Open
Photographer: Richard Drew/AP

Traders work on the floor of the New York Stock Exchange on July 29, 2011.

The S&P 500 rallied earlier, rebounding from its worst weekly loss in a year, as lawmakers prepared to vote on a deal to increase the federal debt limit and avoid default. The index posted a third straight monthly loss in July on speculation Republicans in the House would fail to reach a compromise with the Democrat-controlled Senate and President Barack Obama to boost the nation’s ability to borrow by tomorrow’s deadline.

Manufacturing

Equities erased their gains as data showed U.S. manufacturing expanded in July at the slowest pace in two years, indicating the industry that’s been driving the economic expansion is starting to weaken. The Institute for Supply Management’s factory index fell to 50.9 last month from 55.3 in June. Economists projected the index would drop to 54.5, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion.

Manufacturing indexes from Asia to the U.S. to Europe fell in July as demand weakened and the global recovery from recession lost momentum. U.K., Russian and Australian manufacturing shrank last month, while the pace of factory growth slowed in Europe and China, according to surveys today.

‘Pervasive Weakness’

“We’re seeing a pervasive weakness across the global spectrum of manufacturing,” Randy Bateman, chief investment officer of Huntington Asset Management in Columbus, Ohio, said in a telephone interview. His firm oversees $14.8 billion. “The market has been consumed with the budget deficit crisis and the debt ceiling. In reality, we’re looking at fairly weak numbers that are coming out of our economy.”

The House plans votes today and the Senate may follow suit to consider the agreement reached during a weekend of negotiations that capped a months-long struggle between Obama and Republicans over raising the $14.3 trillion debt ceiling. Both parties were working to sell the deal to their rank and file -- meeting resistance from social liberals who fault it for failing to increase taxes and from fiscal conservatives who say it’s insufficient to rein in the debt.

Both S&P and Moody’s Investors Service are weighing whether to cut the U.S. credit rating. The impasse boosted to 50 percent the chance that S&P will downgrade the U.S. from AAA within three months, the ratings company said last month.

Interest Rates

If the country defaults on some obligations after Aug. 2 and pays bondholders, S&P said short- and long-term interest rates would rise by 0.5 percentage point and 1 point, respectively.

A gauge of health-care companies in the S&P 500 slumped 2.5 percent as 50 of its 52 stocks decreased. Health Care REIT Inc. (HCN) fell the most in the S&P 500, sliding 7.8 percent to $48.64, while HCP Inc. (HCP) retreated 5 percent to $34.91.

The KBW Bank Index of 24 stocks fell 0.5 percent after earlier rising as much as 1.5 percent. U.S. Bancorp dropped 0.7 percent to $25.87. Regions Financial Corp. (RF) slid 2.1 percent to $5.96.

The decline in stocks brought the S&P 500 below its average price of the last 200 days of about 1,285. A drop below the 200- day moving average could trigger further losses, according to analysts who study charts to make forecasts.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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