The stock markets greeted 2008 with a broad-based selloff Wednesday on bad news on manufacturing and oil prices, but all three of the major indices regained about half of Wednesday losses in midday trading Thursday after the Commerce Department reported that November factory orders rose by 1.5% and the Labor Department said its weekly tally of jobless claims fell 21,000 last week, about four times more than the street was expecting .
Builder stocks, however, lost ground, with the S&P XHB home building exchange traded fund off 2.25% and most individual stocks off between 1% and 4%. An exception was Orleans, which was up another 4.75% on top of a 6%-gain on Wednesday after it announced the sale of 1,400 lots.
The factory-order data seemed to contradict a report issued Wednesday by the Institue for Supply Management that said its index fell to 47.7 in December, indicating contraction in the manufaturing sector for the first time after 10 months of growth. However, much of the increase in factory orders, which is measured in dollars, was attributable to inflation caused by higher energy prices.
The ISM report detailed increases in the prices of all the commodities it tracks. Meanwhile, oil, which briefly touched $100 per barrel in trading on Wednesday, settled in at slightly over that level by late morning Thursday.
"December was apparently a very tough month as new orders, production and employment were all below the break-even mark of 50 percent," said Norbert J. Ore, chair of the ISM's Manufacturing Business Survey Committee. "Industries close to the housing market appear to be struggling more than others, and those involved in exports seem to be doing better. Slower demand appears to be more of a problem than excessive inventories based on the respondents' comments."
On Wednesday, markets briefly responded favorably to the release of the minutes of the December meeting of the Federal Reserve Open Market Committee at 2 p.m., which indicated the Fed may be prepared to cut its benchmark rates further when it meets at the end of January. According to those minutes, "Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy."
The minutes also stated that, at the time of the December meeting, "In view of the further tightening of credit and deterioration of financial market conditions, the stance of monetary policy now appeared to be somewhat restrictive. Moreover, the downside risks to the expansion, result- ing particularly from the weakening of the housing sector and the deterioration in credit market conditions, had risen."
There was evidence in the minutes that the Fed is waking up to the severity of the housing downturn: "Recent data and anecdotal information indicated that the housing sector was weaker than participants had expected at the time of the Committee¹s previous meeting. In light of elevated inventories of unsold homes and the higher cost and reduced availability of nonconforming mortgage loans, participants agreed that the housing correction was likely to be both deeper and more prolonged than they had anticipated in October. Moreover, rising foreclosures and the resulting increase in the supply of homes for sale could put additional downward pressure on prices, leading to a greater decline in household wealth and potentially to further disruptions in the financial markets."