NEW YORK (AP) — The stock market’s best July in 20 years is giving investors reason for hope about the US economy.
Investors are placing big bets that the ability of companies to squeeze out surprise profits means the longest recession since World War II is finally easing its grip. But even as earnings and some economic reports suggest the economy is strengthening, the stock rally means investors will pay a bigger price if they are wrong.
The Dow surged 8.6 percent for the month, with most of the gains arriving in bursts in the final 15 days. The extraordinary run shaped July into the best month for the blue chips since October 2002 and the best July since 1989.
The broader Standard & Poor’s 500 index, a benchmark for many mutual funds, also ran at a strong pace and July was its best performance since 1997. Even with the gains, the S&P is still down 37 percent from its peak in October 2007.
The companies that fared best in July were those that signaled they were patching up their businesses after a terrible winter and fall. Caterpillar Inc.’s earnings for the April-June quarter fell but the company raised its profit forecast for the year. Its stock surged 33.4 percent for the month.
Earnings reports that fueled the rally often contained a few dark spots. Many companies have been increasing their bottom line by taking a knife to costs. Eventually they will have to bring in more revenue because cost cuts can’t increase profits forever.
Most companies are still making far less money than they were before the recession intensified last fall. Investors hoping for a slice of future profits are looking to the latest reports as reason to get in now.
Stu Schweitzer, global markets strategist at J.P. Morgan’s Private Bank in New York, said the lower expenses means companies will be better positioned to reap big earnings when the economy does grow and revenue starts to tick higher.
Economic reports are starting to support traders’ bets. The government reported Friday that the economy shrank at a pace of just one percent in the second quarter, better than analysts anticipated and the latest evidence that the recession is ebbing. In the first three months of the year the economy shrank at a pace of 6.4 percent, the steepest slide in nearly 30 years.
Despite the improving outlook, the economy still faces significant hurdles. Schweitzer and other analysts worry that difficulty for consumers in borrowing, unemployment and a still-weak housing market will keep growth in check. Key reports next week on manufacturing, housing, employment and the service industry could also reshape the market’s view about where the economy is headed.
“I don’t think this is a one-way staircase back up to where we came from. I fully expect potholes along the way,” Schweitzer said.