Dow soars, then plunges as investors remain uneasy

Economic report stifles enthusiasm on debt limit deal

By Todd Wallack
Globe Staff / August 2, 2011

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The celebration on Wall Street over the debt ceiling deal didn’t last long.

The market opened sharply up yesterday on euphoria that Congress and the White House had struck an agreement to raise the debt limit and avoid a potentially devastating default on the nation’s debt.

But within minutes, the mood soured, after new data increased concerns about a sluggish economy, while fears grew that the deal would not be enough to prevent the United States from losing its top credit rating. After a half hour, the market was in negative territory.

“I suspect a lot of individual investors will be a little confused by the markets’ reaction,’’ said David Joy, chief market strategist for Ameriprise Financial Inc., the parent of Columbia Management, a Boston mutual fund company. “We got an initial relief rally, but it quickly dissipated. Despite a deal in Washington, the cold hard reality is that there are a lot of questions about the fundamental strength of our economy.’’

The Dow Jones industrial average leaped 139 points in the opening minutes of trading yesterday, before plunging as much as 145 points after the Institute of Supply Management released a key index showing little growth in the manufacturing sector, the latest evidence that the economy’s recovery remains weak. On Friday, the government released data showing the US economy grew at a painstakingly slow pace: less than 1 percent rate for the first half of the year.

By late afternoon, the markets partially recovered after Congress moved closer to approving the deal, but the Dow finished the day down 11 points, the seventh straight day the market has declined.

“Today was a tug of war between more dismal news about the economy and the better news about avoiding a potential default,’’ said James Swanson, chief investment strategist for MFS Investment Management, a Boston mutual fund company.

The reversal was highly unusual. It is only the 10th time since 1985 that the S&P 500 index of large US stocks has shot up at least 1 percent in the first 30 minutes of trading, only to surrender those gains and wind up down by 0.5 percent or more by 10:30 a.m., according to an analysis by Bespoke Investment Group LLC, a financial services firm in Harrison, N.Y. Four of those 10 days occurred during the financial crisis in 2008.

Aside from the manufacturing survey yesterday, many analysts warned that the United States remains in jeopardy of losing its prized AAA credit rating from one of the major credit rating agencies in spite of the deal.

For instance, Standard & Poor’s recently said it is likely to downgrade its rating if the government didn’t agree to at least $4 trillion in cuts or tax increases to narrow the deficit, nearly double the amount under the pact Congress worked out with the White House.

The nonpartisan Congressional Budget Office estimated the compromise agreement would trim the deficit by only $2.1 trillion over the next decade. And many details about the spending cuts remain up to a congressional committee to be decided later, further undermining confidence in Washington’s ability to tackle the budget.

Swanson, the MFS executive, said it’s likely that one of the credit rating agencies will downgrade the United States’ rating, unless Congress goes beyond the terms of this week’s compromise and agrees to cut spending or increase taxes by a total of at least $4 trillion. He said the country remains in danger of taking on too much debt.

“You have to substantially take yourself out of the danger zone,’’ Swanson said. “The rating agencies are watching this and $1 trillion or $2 trillion isn’t going to do it.’’

Todd Wallack can be reached at