Stocks start August with big rally after better-than-expected report on manufacturing

Economic reports give stocks big start for August

NEW YORK — The stock market began August with a huge rally after reports from around the world revived investors’ faith in the global recovery.

The Dow Jones industrial average rose 208 points Monday to its highest close in three months. All the major stock indexes rose about 2 percent.

The first day of the month brought a stream of news that reassured investors who have worried about a slowing of economic growth in the U.S., China and Europe. Manufacturing was a common thread:

— The Institute for Supply Management’s index of U.S. manufacturing activity during July was better than the market expected. Factory activity has now been expanding for a full year, one of the brightest spots in the U.S. economy.

— A manufacturing report for the 16 countries that use the euro was revised higher for July and showed that the European economy is recovering faster than expected. Strong earnings reports from European banks also pleased the market, especially after the continent’s rising debt problems helped trigger a spring plunge in stocks.

— From China came news that industrial growth was moderate enough that Beijing isn’t likely to take steps to slow that country’s economy. Investors have periodically sold stocks on concerns that China’s economy would slow and pull others down with it.

Monday’s news was encouraging after months of reports that showed the recovery was weakening. Those reports pulled the major stock indexes off their 2010 highs in late April and contributed to sharp swings in stock prices since then. The ISM report is significant because it is the first major reading of the economy from July, and investors are trying to determine just how strong the recovery will be in the second half of the year.

Some analysts were cautious even as stock prices jumped.

Alan Gayle, senior investment strategist for RidgeWorth Investments in Richmond, Va., said Monday’s news, while good, showed only small changes in the economy.

“I do believe the pace of the (economic) expansion is slowing and I think that’s going to weigh on the markets as we go through the second half of the year,” he said.

Volume was light Monday as many investors, following the strategy they used during July, decided to stay out of the market until they feel more confident that its gains will hold. Many traders are also on vacation, and the drop in activity can exaggerate price moves.

The Dow rose 208.44, or 2 percent, to 10,674.38, its highest close since May 13, when it finished at 10,782.95. All 30 of the Dow stocks closed higher.

This was the Dow’s best first trading day for the month of August since 1934. August in general is seen as a volatile month for stocks, largely because of the light volume.

The Standard & Poor’s 500 index rose 24.26, or 2.2 percent, to 1,125.86, while the Nasdaq composite index rose 40.66, or 1.8 percent, to 2,295.36.

Six stocks rose for every one that fell on the New York Stock Exchange where volume came to a light 4.2 billion shares, down from Friday’s 4.6 billion.

With stocks looking more appealing, bond prices fell because investors felt less need to seek the safety of government securities. The yield on the 10-year Treasury note, which moves opposite its price, rose to 2.97 percent from 2.91 percent late Friday. Its yield is often used as a benchmark to set interest rates on mortgages and other consumer loans.

Stocks were up across the market. Industrial and materials stocks, including 3M Co. and General Electric Co., rose after the ISM report. Investors were encouraged in particular by several key components of the index. Production and new orders both improved, as did companies’ willingness to hire new employees.

3M rose $1.87, or 2.2 percent, to $87.41, while GE rose 29 cents to $16.41.

Energy companies rose as the price of oil gained on expectations that a healthier economy will lift demand. ExxonMobil Corp. rose $2.26, or 3.8 percent, to $61.94, while Chevron Corp. jumped $1.59, or 2.1 percent, to $77.80.

Benchmark crude rose $2.39, or 3 percent, to settle at $81.34 a barrel on the New York Mercantile Exchange.

Financial stocks rose on the strong earnings reports from European-based banking giants HSBC and BNP Paribas, which convinced investors that the continent’s financial sector is not being hurt by the debt problems.

HSBC shares trading in the U.S. rose $2.66, or 5.2 percent, to $53.74. Bank of America Corp. rose 40 cents, or 2.9 percent, to $14.44. JPMorgan Chase & Co. rose $1.36, or 3.4 percent, to $41.64.

Whether investors can hold on to their optimism will turn on the government’s July employment report, which is being released on Friday.

“The public is more cautious,” said Bruce McCain, chief investment strategist at Key Private Bank.

McCain said it would take a string of economic reports that consistently beat expectations to bring more investors back into the market. That makes this week especially important with plenty of reports, including the employment report and ISM’s service sector report, due out later this week.

Britain’s FTSE 100 gained 2.7 percent, Germany’s DAX index rose 2.3 percent, and France’s CAC-40 rose 3 percent. Japan’s Nikkei stock average rose 0.4 percent and Hong Kong’s Hang Seng jumped 1.8 percent.