Debt crisis averted, stock market focus will turn back to economy

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The U.S. stock market lately has felt a lot worse off than it really was.

That’s the backdrop as the new trading week begins, with Congress and the White House apparently in a deal to raised the federal debt ceiling ahead of Tuesday’s cash-crunch deadline for the Treasury.

July was the third straight losing month for equities, but key indexes haven’t given up a huge amount of ground despite the debt drama in Washington and a barrage of weak economic data in recent weeks.

The Standard & Poor’s 500 index (charted below) fell 3.9% last week to end Friday at 1,292.28. But it’s down a modest 5.2% since reaching a multiyear closing high of 1,363.61 on April 29.

So the decline so far doesn’t even qualify as a garden-variety “correction” in a bull market. A typical correction knocks 10% to 20% off market indexes. A drop of more than 20% would constitute a new bear market.

The market last week continued the trend in place since major indexes peaked in April: The selling has been concentrated in shares of companies that are most sensitive to the economy’s swings. That has been offset by much smaller losses in shares of companies whose businesses are less cyclical in nature.

The point being: If you have a diversified portfolio, this pullback has been a hiccup so far. That was true at the market’s recent lows in June, too.

Of the 10 major industry sectors in the S&P index, industrial stocks have fallen the most since April 29, down an average of 10.6%. That group includes names such as Boeing, Deere & Co. and 3M Co.

Other sectors that have been hit hard include financials (down 9.7% on average since the April high) and basic-materials shares (i.e., commodity producers), off 6.6%.

Meanwhile, the utility sector within the S&P index is up 0.02% since April 29. Utilities are classic “defensive” stocks, meaning they tend to be a good place to hide amid market turmoil. Their above-average dividend yields also are a draw.

Another defensive sector that has held most of its ground is the so-called consumer staples group, which includes companies such as tobacco giant Altria Group, cereal maker Kellogg Co. and drugstore chain CVS Caremark. That stock sector is off just 2.2% since April 29, on average.

Stocks of smaller companies have fallen faster than blue chips over the last week, month and three months, but that’s typical when the market weakens. Yet small-stock indexes also are down less than the ‘correction’ threshold of 10%.

The Russell 2,000 small-stock index (charted at right) slumped 5.3% last week. It’s down 7.9% from its 2011 high reached on April 29.

The S&P 400 index of mid-size company stocks lost 4.9% last week and is off 7.1% since April 29.

Assuming the federal debt mess is resolved, investors are likely to focus more intently on the economy’s prospects. So far, strength in second-quarter earnings at many companies has largely offset concerns about faltering U.S. growth apparent in much of the economic data.

This week, Wall Street will get key reports on the economy in July, including the ISM manufacturing-sector index (due Monday), car sales (Tuesday), the ISM services-sector index (Wednesday) and the all-important employment report (Friday).

With stocks holding on to most of the hefty gains they’ve racked up over the last year, the market clearly doesn’t believe what much of America believes -- that another recession (or worse) is looming.

This week’s data may help show who’s got it right on the economy as the U.S. debt drama recedes.

-- Tom Petruno

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