A Strong ISM Report Didn't Help Wall Street Shake-Off A Global Market Sell-Off

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Includes: DIA, QQQ, SPY
by: BubbleBustInvesting

Summary

The service sector continued to expand last month.

That didn't help Wall Street shake-off a global sell-off.

Wall Street is worried about interest rate hikes.

The US service sector continued to grow at a healthy pace in March, according to the Institute of Supply report released this, morning. The ISM services index, which monitors the state of service sectors like health care and retailing, rose to 54.5% in March, exceeding market expectations-a reading above 50 indicates that the service sector expands.

The index was driven higher by gains in business, activity, employment, and new orders; and it is consistent with the payroll report published last Friday, which indicated that the U.S. labor market picture is improving thanks to job gains in the service sector.

Total nonfarm payroll employment rose by 215,000, the U.S. Bureau of Labor Statistics, thanks to continuing hiring in retail trade, construction, and health care, which registered strong job gains.

While the service sector has been expanding at a healthy pace in March, the manufacturing sector has been contracting; according to a government report released this yesterday. Factory orders dropped by 1.7% in January; orders for February were revised downwards, from 1.7% to 1.5%.

The divergence between the two sectors could be attributed to the nature of each sector. The service sector is domestically oriented. This means that its performance depends largely on the performance of the US economy alone.

The manufacturing sector, by contrast, is both domestically and internationally oriented. This means that it is exposed to two factors recently. First is a stronger US dollar back in September and November, a trend that has been reversed recently-see table. Second is a weak global economy, especially Canada and Japan, America's two major trade partners.

Statistic

September-November

February-April

US Dollar Index

+8%

-4%

Global Growth

3.1

+3.6

Click to enlarge

Source: MarketWatch; IMF

Country

Growth Rate

Canada

0.20

Euro Area

1.60

Japan

0.70

Mexico

2.50%

Click to enlarge

Source: Trendingeconomics.com

The strong ISM report was mixed news for Wall Street. On the one side, a strong service sector means higher revenues and earnings for service providers. On the other side, a strong service sector re-ignites fears that the Federal Reserve will hike interest rates sooner than later.

That could explain why Wall Street failed to shake off an early morning sell-off.

Major Equity Indexes at 11qm

Index

Tuesday's

Performance (%)

SPDR S&P 500 Trust (NYSEARCA:SPY)

-0.66

PowerShares QQQ Trust (NASDAQ:QQQ)

-0.56

SPDR Dow Jones Industrial Average (NYSEARCA:DIA)

-0.40

Click to enlarge

Disclosure: I am/we are long QQQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.