Market Snapshot July 31, 2009, 4:30PM EST

Stocks End Mixed on GDP News

The GDP report showed a smaller drop than expected for the second quarter, sparking hopes that the economy is recovering

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The last day of July turned mixed for stocks following a GDP report that showed a steeper decline in economic growth in previous quarters, but a smaller drop than expected for the second quarter, supporting investor hopes that the economy is on the road to recovery.

In other news, the International Monetary Fund predicted a "gradual recovery" in the U.S. economy, and the House approved a measure to add $2 billion to the Cash for Clunkers car purchase incentive program.

Friday's big news was an update on the health of the economy. U.S. second quarter GDP growth declined 1.0%, which was much better than the 1.7% decline that markets expected. First quarter GDP was downwardly revised to a -6.4% rate from -5.5%, and fourth quarter was revised up to a -5.4% pace from -6.3% previously reported. Real consumption declined at a 1.2% clip (weaker than expected), after a sharply upwardly revised 0.6% increase in the first quarter. The BEA also reported that real GDP increased 0.4% for 2008, rather than the 1.1% gain previously calculated.

"While benchmark revisions changed the trajectory of the data, the sharp slowdown in the rate of decline in the second quarter offers support to market expectations that the recession has troughed," wrote S&P economist Beth Ann Bovino in a note Friday. "The better than expected GDP report will add more fuel to market beliefs that the recession is behind us."

In other economic news, the employment cost index rose 0.4% in the second quarter, slightly stronger than the 0.3% pace markets expected. The July Chicago PMI rose to 43.4 from 39.9.

On Friday, the 30-stock Dow Jones industrial average rose 17.15 points, or 0.19%, to 9,171.61. The broad Standard & Poor's 500-stock index edged up 0.73 point, or 0.07%, to 987.48. The tech-heavy Nasdaq composite index fell 5.80 points, or 0.29%, to 1,978.50.

The dollar index fell 0.91 to 78.36, after touching a low of 78.22, which was the lowest level since Dec. 18. The better-than-expected U.S. second quarter GDP report sparked dollar selling and stock market buying, says S&P MarketScope.

Treasuries rose on the economic data, sending the 10-year note up 25/32 to 96-28/32 for yield of 3.512%. Gold and oil futures moved higher in volatile trading. Crude oil rose $1.23 to $68.17 per barrel.

Investors enjoyed a nice summer rally in July. The S&P 500 rose 7.3% for the month through July 30, the best July performance since 1997, and well-above its average advance of 0.81% since 1945, according to Sam Stovall, chief investment strategist at Standard & Poor's. "But since we are in the period following a bear market bottom, it should come as little surprise that we saw performance fireworks in this otherwise lackluster month," wrote Stovall in a note Friday.

All 10 sectors rose, led by the cyclical Materials, Financials and Industrials sectors, which posted increases of 18.8%, 16.1% and 14.9%, respectively. "It appears as if the bulls have a firm grasp on this market's steering wheel and gas pedal, as the fundamental trend continues to show improvement," Stovall wrote.

Next week brings a flock of earnings reports, including from Cisco Systems (CSCO) on Wednesday, and Friday's employment report for July.

Among stocks in the news Friday, Walt Disney (DIS) reported third quarter earnings of $0.52 per share, vs. $0.62 a year ago (excluding items), on 6.9% lower revenue. Including items, GAAP EPS totaled $0.51, vs. $0.66. S&P kept a buy opinion on the stock, while JP Morgan reportedly downgraded to underweight from neutral.