Though equities were mixed in the month of July, pessimism continued to rule amid low volumes and continuing profit warnings. The Dow Jones Industrial Average actually moved up for the month, the only equity index to do so, yet most of the gain was due to end-of-month bargain hunting. July began and ended about the same for the Dow, hovering around 10,500 points and moving in roller coaster fashion throughout the month. The NASDAQ composite index began the month comfortably above 2,000 points, began a move down under 2,000 before edging back up to the level for the final two weeks of July. Earnings warnings from technology companies throughout the month dominated the news and kept market players from gaining any sense of optimism and the market from sustaining any rallies. FOMC meetings and interest rate cuts were absent during the month. Instead, investors had to sift through economic reports showing continuing weakness and Chairman Greenspan's testimony to Congress on the 18th. Despite the rally in the last week of July, investors are still waiting for interest rate cuts to take effect and continue to look to the Fed to help stop the bleeding.

Sectors that had been performing well began to fall off slightly in July. The technology-consumer service side declined, though major technology companies focused on software and PC-manufacturing performed well. The retail sector remained rather flat due to the general drop-off in technology, while transportation and health-care stocks continued June's positive performance. The big surprise in equities was the financial sector, which had not been performing well for the past few months. Financial stocks rallied at the close of the month. Energy stocks also increased from their June levels, but not significantly enough to reverse their negative trend. It was this increase in large-cap financial and energy stocks that led to the Dow Jones increase for the month, while the NASDAQ finished down on the month mainly from the suffering technology sector.

There were a few major moves in the month. Profit surprises from technology and telecommunications companies on the 12th and 17th and a bargain-hunter's rally on the 31st kept the Dow above water and pared most of the losses on the NASDAQ. Greenspan told Congress on the 18th that the economy remained slow, with no exceptional signs that it would improve any time soon. These negative comments led to a sell-off in equities. While the positive days outweighed the negative on the Dow, most equity indices fell off for the month. The Dow finished up barely 0.2 percent, while the NASDAQ finished down 6.5 percent. The S&P 500 moved similarly to the NASDAQ and finished down 6.6 percent for July. The Russell 2000 moved 5 percent lower on the month, while the market-encompassing Wilshire 5000 index moved 1.8 percent lower for July.

Treasury Market: Moving on Up

Prices of Treasury securities gained throughout the month of July as economic reports revealed that economic activity remained anemic. The data combined with Greenspan's sour testimony on the 18th to push yields down across the spectrum of maturities for the month. While July did see some days of negative Treasury movement, especially those when stocks performed well, securities basically remained on a positive track throughout the month. Market players are taking all the negative economic news from the weak employment situation to the ongoing recession in manufacturing as signs of a 25 or 50 basis point rate cut at August's FOMC meeting.

As the chart shows, yields moved down across the board as the underlying trend in the fixed-income market continues to be positive. July did yield fairly drastic moves in Treasury securities. The longer end saw the 30-year bond lose 23 basis points on the month and the 10-year note drop 36 basis points. The shorter end of the curve saw the 5-year note lose 43 basis points, the 2-year note lose 46 basis points and the 3-month bill decline by 12 basis points for the month of July.

In a new twist, the U.S. Treasury announced and auctioned off brand new 4-week bills. The new security is intended to help the Treasury better manage its cash-balance needs, with the hopes of eliminating occasional cash-management bills, which tend to be more expensive for the Treasury than regularly scheduled auctions. The auction went well, with a high discount rate of 3.590 percent and healthy demand as the bid-to-cover ratio reached a level of 3.370.

Damir Fonovich, Economist, Econoday