Stocks finished modestly lower Monday amid profit taking, after rallying Friday on hopes the Federal Reserve would not raise interest rates at its Aug. 8 meeting. Ahead of a week packed with economic data, market players were facing uncertainty over the Fed's future course, says Standard & Poor's Equity Research.
The Dow Jones industrial average fell 34.02 points, or 0.3%, to 11,185.68, led downward by Merck (MRK) and Boeing (BA). The broader Standard & Poor's 500 slipped 1.89 points, or 0.15%, to 1,276.66. The tech-heavy Nasdaq composite edged down 2.67 points, or 0.13%, to 2,091.47.
Volume was light. NYSE breadth was slightly negative, with 18 issues declining for every 15 advancing, while Nasdaq breadth was 16-14 negative.
Investors were turning their attention toward the Fed's Aug. 8 meeting. "Our call -- by the thinnest of margins -- is that [the Fed] will tighten one last time," says Jan Hatzius, chief U.S. economist at Goldman Sachs. "However, this could still easily change given the heavy data load due next week."
If the economy can sustain its growth over the next six months, a recession probably isn't in the cards for next year, some analysts say. "It's showtime for the economy," notes Ed Yardeni, chief investment strategist at Oak Associates. "If it has the resilience we believe it does, then the housing recession, flattening home prices, gasoline prices over $3, heightened geopolitical risks, and one more (and last?) hike in the federal funds rate shouldn't cause a significant slowdown or a recession."
Meanwhile, Morgan Stanley was shifting 5% of its bond allocation into stocks. "Yields could go lower from here, but they will do so without us," observes Henry McVey, chief U.S. investment strategist at Morgan Stanley. "Equities seem poised to move higher if bond yields do hold at current levels."
A pair of Fed speakers did little to clarify the central bank's intentions Monday. St. Louis Fed President Bill Poole said he saw a "50-50" chance of a rate hike at the Aug. 8 meeting. San Francisco Fed President Janet Yellen said the Fed remains data-driven and that the federal funds rate is "in the vicinity" of the right level.
An economic report was similarly ambiguous. The Chicago purchasing manager's index rose unexpectedly to 57.9 in July from 56.5 in June. The underlying data were mixed and shouldn't affect Fed expectations, says Action Economics.
The main event this week is Friday's employment report. Data releases due Tuesday include June personal income and construction spending, July vehicle sales, and the July reading of the Institute for Supply Management's manufacturing index.
Earnings continued to garner attention Monday. Health insurer Humana (HUM) was higher after reporting a 10% increase in second-quarter net income.
Meat processor Tyson Foods (TSN) was lower after the company posted a wider-than-expected quarterly loss and trimmed its outlook for the year.
Among companies slated to announce quarterly results Tuesday are Archer Daniels Midland (ADM), Eastman Kodak (EK), Hilton Hotels (HLT), Lowe's (LOW), and Verizon (VZ).
Elsewhere, Wal-Mart (WMT) was little changed after the retail giant reported a 2.4% increase in July same-store sales, in line with the company's projections.
Shares of Pfizer (PFE) declined slightly after the drugmaker named Jeffrey Kindler as its new CEO to replace Hank McKinnell, who will remain as chairman until February.
Investors were also digesting M&A activity. Flash memory maker SanDisk (SNDK) was lower after the company agreed to buy Israeli rival M-Systems Flash Disk Pioneers for about $1.3 billion in stock.
In analyst calls, Apple Computer (AAPL) was higher after Banc of America raised its recommendation on the computer maker from neutral to buy.
Copper producer Phelps Dodge (PD) was up after Prudential upgraded the shares from underweight to overweight.
In the energy markets, September West Texas Intermediate crude oil futures closed up $1.16 at $74.40 a barrel amid ongoing Mideast tensions and reports of a Russian pipeline leak. Separately, the U.N. Security Council gave Iran one month to suspend nuclear production.
European markets finished lower. In London, the Financial Times-Stock Exchange 100 index shed 46.6 points, or 0.78%, to 5,928.3. Germany's DAX index eased 23.45 points, or 0.41%, to 5,681.97. In Paris, the CAC 40 index was down 19.09 points, or 0.38%, to 5,009.42.
Asian markets finished higher. Japan's Nikkei 225 index advanced 113.94 points, or 0.74%, to 15,456.81. In Hong Kong, the Hang Seng index inched up 16.3 points, or 0.1%, to 16,971.34. Korea's Kospi index nudged higher 0.75 points, or 0.06%, to 1,297.82.
Treasuries drifted after the comments from the Fed's Poole and Yellen. The 10-year note edged up in price to 101-02/32 for a yield of 4.99%, while the 30-year bond was little changed at 91-09/32 for a yield of 5.07%.