NEW YORK -- The debt deal rally lasted all of 30 minutes.
After gaining 139 points minutes after the market opened Monday, the Dow Jones industrial average sharply reversed course, shedding all of those gains after a key manufacturing index tumbled in July.
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The Dow is down more than 135 points after the Institute of Supply Management said its manufacturing index was barely above the 50 point figure that indicates growth. Economists had been expecting a much higher reading of 55.
"This was a shock to the market," said Phil Orlando, chief strategist at Federated Investors. "It clearly offset the emotional strength that we saw in the open from this tentative budget compromise."
Many investors had expected the stock market to rally because President Barack Obama and Congressional leaders announced Sunday that they had agreed on a deal to raise the nation's borrowing limit ahead of Tuesday's deadline.
The Dow Jones industrial average was down 138 points, or 1.1 percent, to 12,005 in midday trading. It is the seventh day of declines for the Dow.
The broader Standard and Poor's 500 index lost 17, or 1.3 percent, to 1,276. The Nasdaq composite lost 34 or 1.3 percent, to 2,722.
Monday's losses brought the S&P index below its 200-day moving average of 1,280. Anytime the market falls below the long-term moving average, it often fuels additional losses. Orlando said the S&P could fall to 1,250 or lower over the next few days as investors begin to doubt the strength of the economy.
Health care stocks, which lost 2.6 percent, were the S&P index's worst performers by midday Monday. Merck & Co., Home Depot Inc., and Pfizer Inc. led the Dow lower with losses of 2 percent or more.
Bond yields fell to the lowest level of the year as investors moved into safer assets. The yield on the 10-year Treasury note fell to 2.73 percent from 2.80 percent late Friday.
The manufacturing report that sparked the sell-off comes after other dour news. On Friday, the government said that so far this year the economy has grown at its slowest pace since the recession ended in June 2009. The economy grew at an annual rate of just 1.3 percent from April through June. A debt deal that contains sharp reductions in short-term government spending could further weaken the economy, analysts say.
The latest signs of weakness in the U.S. economy pushed the dollar lower against the Japanese yen and the Swiss franc, two currencies that traders see as relatively safe bets. The dollar touched another record low against the franc, and reached a post-World War II low against the yen.
Before the ISM report was released, stocks rose sharply largely because President Barack Obama and Congressional leaders announced Sunday that they had agreed on a deal to raise the nation's borrowing limit ahead of Tuesday's deadline. Investors have been worried that the U.S. might default if a deal wasn't reached. The federal government would be unable to pay all of its bills after Tuesday if a law is not signed. Among them: interest payments on Treasury bonds, salaries of federal employees and Social Security checks to retirees.
The debt agreement would raise the U.S. debt limit by $2.1 trillion. It would also cut at least $2.4 trillion in federal spending over 10 years. Under the bill, a new joint committee of Congress would recommend deficit reductions by the end of November that would be put to a vote by Congress by year's end.
The fact that Congress hadn't yet passed the bill and that many important details were left to the new committee left some investors skeptical that it overs impact. "The debt agreement was a step in the right direction but probably a small step," said Bob Gelfond, the head of MQS Asset Management, a hedge fund based in New York City.
Others remained skeptical that the bill would cut the deficit enough to prevent a downgrade to the U.S. government's stellar credit rating. Credit ratings Standard and Poor's and Moody's declined to comment on the bill.
Some investors believe that a downgrade remains a possibility. "This agreement didn't resolve any of the fundamental differences in the direction of spending and revenues that would address our long-term issues," said Kate Warne, the investment strategist at Edward Jones.