An oversold condition, plus strength in the dollar, plus some better-than-expected economic data helped stocks move higher early Monday, notwithstanding weakness in defense stocks after the Columbia shuttle tragedy. Meanwhile, Treasuries were under pressure, thanks to the strong data and President Bush's budget proposal. As of 1:49 p.m. EST, the Dow Jones Industrial Average was up 1.11% to 8143.21, although down from its earlier high of 8150.89. The S&P 500 was higher by 0.9% to 863.56, vs. its early best of 864.66, and the Nasdaq Composite was up 0.85% to 1332.10, after having traded as high as 1334.91. Meanwhile, the price of the benchmark 10-year Treasury note was down 13/32 to 99 28/32, its yield rising to 4.01%. The president's budget would create a record $307 billion deficit in fiscal 2004, raising concerns about the government's need to increase its borrowing via the issuance of Treasury securities. Stock futures were higher in premarket hours and shares opened with modest strength Monday, piggybacking on strength in the greenback. The dollar was most notably strong vs. the Japanese yen, which fell to a six-week low after Japanese officials talked about "massive" sales in order to weaken the currency. The dollar then received a secondary boost following the 10 a.m. EST release of the January ISM Manufacturing Index and December construction spending data. Of late, the U.S. Dollar Index was up 0.06 to 99.97. The Institute for Supply Management said its key index of manufacturing conditions came in at 53.9 for January, down from an upwardly revised 55.2 in December but slightly ahead of consensus estimates. The new orders index slid to 59.7 from 69.2 in December but still was relatively high, while the headline index was above 50 for a third-straight month, indicating expansion in the manufacturing sector. "It is key to remember that strength in manufacturing depends crucially on final demand strength," about which there is still uncertainty after a sub-par fourth quarter, observed Peter Kretzmer, senior economist at Banc of America. "Current strength may derive from better capital spending demand in recent months, but may also simply reflect very low inventories across most industries."
In other words, it's too soon to declare that the manufacturing sector is out of the woods. Separately, the Commerce Department reported U.S. construction spending rose 1.2% in December, well ahead of consensus expectations, while November's data were revised upward to 0.9% from 0.3%. However, construction spending rose just 0.4% for all of 2002, the weakest year since 1993, when spending fell 9.3%. Furthermore, the vast majority of last year's increase was due to residential home construction; nonresidential (i.e., business) construction fell 16.4% last year.
Friday's poll about issues affecting readers' spending habits suggest concerns about war with Iraq are overstated and overrated. The poll is very unscientific and TheStreet.com's readers are generally better off financially than the "average" American, but the poll indicates economists may be greatly overestimating the impact of "war fears." ( Imagine that, economists being way off base.)
Only a shockingly low 3% of the nearly 1,400 respondents said fears of war and/or resulting terrorism were causing them to restrain spending. Granted, job security/loss, selected by 27%, could be a war related-issue, if and as businesses are cutting back because of war jitters. The largest number of respondents, 31%, said weakness in the stock market/too high personal debt was providing the biggest restraint on spending. As with the jobs issue, the weak stock market could be a function of the war talk, as the most optimistic market participants would have us believe. Then again, the stock market has been weak for three years now and the results from that category suggest the hangover from the 1990s mania is having the biggest effect of all on consumers. In perhaps the most interesting result, a surprisingly strong 26% of respondents reported that their spending has either remained the same, or increased. In sum, the poll results suggest talk of war may not be having as great an influence on consumer spending as is commonly assumed.