US Stocks Decline As Investors Eye Weak Data, Debt Drama; DJIA Off 110

NEW YORK (Dow Jones)--U.S. stocks fell Monday, erasing an early rally, as weak manufacturing data and worries that ratings firms could still downgrade the U.S. government's credit overpowered investor relief about a debt-ceiling deal.
The Dow Jones Industrial Average shed 110 points, or 0.9%, to 12033, in afternoon trading. Earlier, it briefly fell below 12,000 for the first time since late June. Monday's volatile market action saw the blue-chip index rise as much as 139 points immediately after the open, as investors greeted the weekend debt agreement, only to decline in midmorning trading.
The Standard & Poor's 500-stock index fell 14 points, or 1.2%, to 1278 recently, with all sectors except telecommunications losing ground. The Nasdaq Composite lost 35 points, or 1.3%, to 2721.
Stocks turned negative after a reading on the manufacturing sector for July showed barely any expansion, renewing worries about the state of the U.S. economy. The data did little to support investors' hopes that the economic "soft patch" seen this year and the aftereffects of Japan's earthquake and tsunami would give way to stronger growth in the second half.
Markets were wary over the state of the U.S. debt-ceiling negotiations, in which the House and Senate were expected to vote on the weekend plan during the afternoon. A second look at lawmakers' weekend pact spurred some investors to worry that the deal wouldn't be enough to obviate the threat of ratings downgrades. There also was concern that the length of the talks and severity of market gyrations were beginning to have an impact on the broader economy.
"Clearly what's going on in D.C. is affecting the overall economy," said Gary Flam, portfolio manager at Los Angeles-based Bel Air Investment Advisors. "The longer [the debt debates] go on, the more headwinds we face. The bulls' argument was [that] you'll have an acceleration in the economy in the second half. That's being called in to question now."
The afternoon losses put stocks on track to add to last week's decline, the Dow's biggest weekly point swoon since May 2010, which came as investors fretted that Washington had run out of time to meet the government's spending obligations past Aug. 2.
Health-care stocks were the S&P 500's weakest performers, after Medicare said it will cut payment rates to skilled nursing facilities by 11.1% next fiscal year, sending shares of health-care providers tumbling. The decision adjusts for what the Centers for Medicare & Medicaid Services calls an unexpected rise in nursing-home payments this fiscal year.
Kindred Healthcare slumped 31% while Sun Healthcare Group plunged 53% and Skilled Healthcare Group lost 44%. Sunrise Senior Living lost 5.9%.
Merck shed 3.3% to lead decliners in the blue-chip Dow. Home Depot was also weak, falling 2.3%.
Earnings reports and corporate-news headlines were largely overshadowed by the debt-ceiling negotiations and weak reading on manufacturing.
"It's a combination of what's going on in Washington this morning and the bigger picture macroeconomic data," said Joe Jennings, investment director for the Maryland region at PNC Wealth Management.
In corporate news, the U.S.-listed shares of HSBC Holdings climbed 2.2% after the bank reported revenue for the first half of the year that exceeded estimates and said it was cutting about 30,000 jobs to revamp its global business.
Paetec Holdings jumped 20% after rural telecom company Windstream said it planned an $891 million all-stock purchase of the company, which focuses on providing broadband and other services to businesses. Windstream's shares shed 1.1%.


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