Stocks rally after positive economic data

NEW YORK -The stock market began June with a big rally, thanks to another wave of encouraging economic data.

But some investors are nervous that the month, traditionally a weak one for stocks, may not end as well. The market's gains on Monday came despite signs that the economy might have a tough slog ahead of it, including rising interest rates and the nation's fourth-largest bankruptcy ever.

Traders homed in Monday on better-than-expected readings on manufacturing, consumer spending and construction spending. The Dow Jones industrial average and other major indexes rose more than 2 percent, and the Standard & Poor's 500 index and Nasdaq composite rose to their highest levels this year.

But while the data suggested the economy's decline is moderating, a trend that has heartened investors this spring, the numbers did not indicate a rebound yet. Construction spending rose in April, but personal spending was down slightly. Personal incomes were flat and U.S. manufacturing activity contracted for the 16th straight month in May, although at a slower pace.

Monday also brought General Motors Corp.'s bankruptcy filing, the fourth-largest in U.S. history. The filing didn't come as a shock, but it did serve as a reminder of the government's heavy involvement in corporate America following the takeovers of American International Group Inc. and the mortgage giants Freddie Mae and Freddie Mac.

Separately, a trend that ruffled investors last week ― falling Treasury prices and surging yields ― resumed Monday as economic data topped estimates and drove the dollar lower. Unlike last week, the stock market shrugged off the rise in long-term borrowing rates, which some fear could hamper a recovery by driving up interest rates on mortgages and other consumer loans.

With stocks' spring rally now nearly three months old, a number of analysts think the market has come too far, too fast since hitting 12-year lows in early March. The S&P 500 had its quickest recovery since the 1930s.

"I can't really buy into today's super-happy stock market," said Kim Caughey, equity research analyst at Fort Pitt Capital Group. She said she was skeptical because even if the economy is stabilizing, there is little to drive demand once it bottoms.

Analysts pointed out that technical factors also pushed stocks higher on Monday. The first trading day of the month often brings with it a surge of new money from mutual funds, and the S&P and Dow both broke through their 200-day moving averages for the first time in well over a year. Moving averages are closely watched technical barometers for the market, and some traders will automatically buy or sell if those levels are breached.

The Dow rose 221.11, or 2.6 percent, to 8,721.44, its highest close since early January. The index is now down only 55 points, or 0.6 percent, for the year.

Dow Jones & Co. announced Monday it is dropping GM as a component after the automaker filed for bankruptcy, as well as Citigroup Inc., in which the government now owns a significant stake. GM and Citi will be replaced with Travelers Cos. and Cisco Systems Inc. next week.

The Standard & Poor's 500 index rose 23.73, or 2.6 percent, to 942.87, while the Nasdaq composite index rose 54.35, or 3.1 percent, to 1,828.68.

This year's stock market has had an eerily similar pattern to last year's, noted Shaeffer's Investment Research analyst Todd Salamone, falling until mid-March and then gaining through May. Then in June of last year, the market started to sink. Salamone pointed out that the average return for the month of June during the past 20 years is negative 0.5 percent.

Standard & Poor's chief economist David Wyss said he expects the U.S. economy to bottom out late this summer or early in the fall, and then experience only a "rather sluggish" recovery. Wyss predicted U.S. gross domestic product ― all of the goods and services produced in a country ― to drop 3.1 percent this year, with even sharper declines in European economies and Japan.

Another hurdle that's approaching later this summer: Second-quarter corporate earnings results. If those come in worse than investors anticipated, Caughey said, "we'll have a reason to hate the market again."

So while the stock market's technical achievements Monday helped bring about gains, they are also raising questions about the staying power of those gains.

Jack Ablin, chief investment officer at Harris Private Bank, noted that returns are much better when the stock market is trading above its 200-day moving average, but that the statistic itself can send "a number of false signals."

Also, trading on the first day of the month is generally much stronger than normal. The S&P 500 index was down about 34 percent in the 10 years leading up to May 1. But according to S&P data, if someone invested in the index only on the first day of the month over that time frame, he or she would have gained 21 percent.

Government bonds fell again Monday, driving yields back near last week's highs. The yield on the 10-year Treasury note, used as a benchmark for home mortgages and other consumer loans, rose to 3.68 percent from 3.46 percent late Friday.

The dollar weakened further Monday against the euro and the British pound. Gold slipped, but oil jumped.

Advancing stocks outnumbered decliners by about 5 to 1 on the New York Stock Exchange, where consolidated volume came to 6.19 billion shares, up from 5.84 billion shares on Friday.

The Russell 2000 index of smaller companies rose 19.75, or 3.9 percent, to 521.33.

Manufacturing surveys out of Europe and Asia topped estimates, which drove up markets overseas. Japan's Nikkei stock average jumped 1.6 percent, while Hong Kong's Hang Seng index soared 4.0 percent. In Europe, Britain's FTSE 100 rose 2 percent, Germany's DAX index rose 4.1 percent and France's CAC-40 gained 3.1 percent.