The best quarter in 10 years is now history, as investors quickly shift their focus to the promise of a bumpy road for stocks in July.
The S&P 500's 15.2 percent gain in the second quarter gain gave it the first up quarter in six, and its biggest percent gain since the fourth quarter of 2003. For the month, it eked out a 0.2 percent gain to 919, but the Dow slipped 0.6 percent in June to 8447. The Dow was up 11 percent for the quarter, while the Nasdaq was up 20 percent.
"It's a disappointment," said veteran trader Art Cashin of Tuesday's decline. "They're (the Dow) going to be down for the month, which is slightly more important. It's still the best (quarter) in over a decade."
Cashin, director of floor operations at UBS, said Wednesday's action will be important. "Usually, in the old days, and I mean old days, you'd look to the third business day of the new month for money to get deployed, but now that's sped up. Tomorrow will be very important to see if a market that looks tired and vulnerable continues to exhibit that."
"I really believed stocks were going to hold in for the end of the quarter. They didn't do that," Cashin said during Tuesday's final hour of trading.
As stocks sold off Tuesday on a surprising dip in consumer sentiment, Treasurys weakened and the dollar rose. Oil lost 2.2 percent to $69.89 per barrel, and other commodities also sold off. Corn was a standout, losing nearly 9 percent after a government crop report showed a high level of plantings. But for the quarter, most commodities show double digit gains.
Wednesday's economic data is basically the warm up act for Thursday, when the monthly employment report for June is released. The ADP employment report, a kind of gauge for the government numbers is issued at 8:15 a.m. ISM, which is a measure of manufacturing activity, is reported at 10 a.m., as are pending home sales and May construction spending. The monthly auto sales for June are released throughout the day, and are expected to show slight improvement at best.
"The market and economic data are certainly intertwined. You could see that today. If you say the background is improving, then fundamentals and valuations are still attractive," said Bill Stone of PNC. He said he expects to see the market "grinding higher."
"The market seems to rejigger its thoughts on future growth based on the economic data of the day. For better or worse, that seems to be where we are for now. It'll be interesting to see what the next step is once we get the official evidence we have entered a recovery. Maybe we get to the next phase, and that's he place we seem to be in and that's what we should expect of the third quarter," said Stone.
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Stone says expect uneven trading after the market's move up since March. "The hurdles have gotten a little higher for economic data, so now you're in this thing where it's one step forward and two steps back. Just by definition, the market shows is has to be a little bumpier because, for the most part, it was on a one way ride since March," he said.
The dollar Tuesday finished at $1.4029 per euro , a gain on the day of 0.4 percent. "There was a little bit more pessimism on the weaker than expected confidence numbers," said Win Thin, currency strategist with Brown Brothers Harriman. He said there was no good explanation for the dollar's gains. "I just think it's technical range trading ahead of the jobs data."
Treasurys Tuesday were on a bit of a roller coaster ride, as disappointing consumer confidence numbers hit the stock market. The yield on the 10-year was at 3.521.
Michael Franzese, who heads the Treasury desk at Standard Chartered, said bonds are hanging on the Thursday employment report. "If this number comes in at 10 percent unemployment, and this is not the blow off bottom everybody was expecting, I think we grind. It's going to be interesting to see what people position for Thursday's early close and how they position for the summer time (lull)," he said. Economists expect an unemployment rate of 9.6 percent.
Bond traders have been keeping an eye on the fiscal crisis in California, as the state begins its new fiscal year Wednesday. California is handing out IOUs on bills it cannot pay.
Franzese said it's unlikely the state will default, or that the federal government will bail it out. "The question is do they get their rating knocked down to junk so bond managers have to knock them out of their portfolios," he said.
Some traders say there could be a flight to quality into Treasurys if California, the biggest municipal issuer, shows more signs of strain or is downgraded.
"They're not going to default," said one banker, familiar with California's fiscal situation. "They won't be downgraded to junk. If they were got get downgraded to junk they'd have a guard time accessing the capital markets."
The state would tighten its belt before risking a lack of access to funding. "If they got downgraded to triple B, they'd be ok. They did all the financing they needed to do for a while ... They have a problem with cash flow because of a mismatch in the way revenues come in," the banker said.
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A cash-strapped California means its cities and counties lose funds they have been relying on, and there is a chance of credit rating reductions for those municipals.