Momentum from positive economic reports in the morning session were washed out on Thursday afternoon, as investors remained apprehensive ahead of the key vote in Congress on the debt-ceiling issue. Finally, just before the closing bell, markets lost all their gains to drop modestly lower with the Dow being the hardest hit and the fear-gauge surging to its highest level since mid-June.
Of the benchmarks, the Dow Jones Industrial Average (DJIA) took a battering, shedding 0.5% to close at 12,241.10. The blue-chip index slipped from its intraday high of 12384.90 and has now lost 4% over the last five trading days. The Standard & Poor 500 (S&P 500) shed 0.3% and settled at 1,300.78. The Nasdaq Composite Index was on the winning side, gaining 0.1% to finish the day at 2,766.25. The fear-gauge CBOE Volatility Index (VIX) leaped to 23.74, its highest level since mid-June. On the New York Stock Exchange, Amex and the Nasdaq, consolidated volumes were 7.93 billion shares, compared with the daily average of 7.47 billion. For every three stocks that moved down, two stocks managed to climb up on the NYSE.
Markets were boosted by positive economic reports coming from the jobs and housing markets. Both of the sectors play a significant role in the economy and obviously better data on these fronts provided optimism about the economic recovery. As for initial claims data, the US Department of Labor reported that seasonally adjusted initial claims had dropped by 24,000 from the previous week to 398,000 for the week ending July 23. Investors cheered the news as unemployment claims have slipped below the 400,000 mark for the first time in four months. The drop in the initial claims was contrary to the consensus estimate of a level of 410,000. The 4-week moving average declined by 8,500 from the previous week's revised average of 422,250 to 413,750.
Investors also drew optimism from an increase in pending home sales for the month of June. According to the National Association of Realtors (NAR) the Pending Home Sales Index was up 2.4% from 88.8 in May to 90.9 in June and is 19.8% above the 75.9 reading in June 2010, “which was the low point immediately following expiration of the home buyer tax credit. The data reflects contracts but not closings. The chief economist of NAR, Lawrence Yun, said: “For the majority of transactions, the lag time between pending contacts to actual closings is one to two months. Therefore, the two consecutive months of rising activity should lead to overall improvement in closed sales in upcoming months. “Though a higher than normal cancellation rate can hold back final closing figures, it could well be that some past cancellations are nothing more than delayed buying decisions rather than outright cancellations, he added.
However, these positives were swept away as investors were weighed down by uncertainty over the course of action Washington will take regarding the debt ceiling. On Thursday, House Speaker John Boehner was to present his revised plan which aimed at cutting spending by $917 billion over 10 years, higher than a corresponding $900 billion increase in the debt ceiling. This revision was a result of observations by the Congressional Budget Office (CBO) that the House Speaker’s proposal would fail to slash spending to the level he had claimed. The CBO had projected that the House Speaker’s bill would reduce US deficits within the range of $850bn to $1,100bn over the next ten years, significantly lower than the $1.2 trillion that Boehner’s office had suggested.
Boehner and his associate Republicans labored to draw support for the plan and the Republicans even held a press conference in Capitol Hill. Boehner commented: “Let’s pass this bill and end this crisis. On the other hand, Senate Majority Leader Harry Reid said that the Senate will instantly reject the bill if is passed.
Investors therefore remain jittery over the possibility of the US losing its ‘AAA’ rating. Earlier, Moody's Investors Services had put the US’ AAA rating under review for a possible downgrade, citing "the rising possibility" that Congress will fail to pass the debt ceiling by August 2. If Congress does not raise its $14.3 trillion debt ceiling by August 2, the Treasury Department may fail to pay at least 40% of its bills.
On the earnings front, corporate reports came to the rescue of the markets by limiting the losses. Among the companies posting strong results were Starbucks Corporation (NASDAQ:SBUX), DR Horton Inc. (NYSE:DHI), EQT Corporation (NYSE:EQT), Goodyear Tire & Rubber Co. (NYSE:GT), Royal Dutch Shell plc (NYSE:RDS-A) and EI DuPont de Nemours & Co. (NYSE:DD). However, the world's largest publicly traded oil company Exxon Mobil Corporation (NYSE:XOM) failed to beat the estimates. Nonetheless its second quarter earnings shot up 41% year over year from $7.6 billion to $10.7 billion, driven by higher commodity price realizations and improved refinery margins. Investors now have their eyes fixed on another oil-giant and Exxon’s peer, Chevron Corp. (NYSE:CVX), whose results are scheduled for Friday.