Why bad news makes stock market happy

NEW YORK — For now, bad news is good for the stock market.

Investors judged that the latest weak economic reports will make it more likely that the Federal Reserve will continue to stimulate the economy and support a rally on Wall Street.

On Monday, a measure of U.S. manufacturing fell in May to its lowest level since June 2009 as overseas economies slumped and weak business spending reduced new orders to factories.

That helped convince investors that the Fed will hold off from slowing down its $85 billion bond-buying program. Speculation that the central bank was set to ease that stimulus, a major support for this year’s rally in stocks, has caused trading to become volatile in the last two weeks.

The Standard & Poor’s 500 index fell in the morning after the manufacturing report was published at 10 a.m. It moved between gains and losses for much of the day, then climbed decisively in the last hour of trading.

The “good news is bad news” interpretation of economic reports may support stocks in the short term, but at the end of the day the economy has to keep improving for stocks to reach new highs, said Alec Young, a global equity strategist at S&P Capital IQ.

“This was a big miss on the ISM report,” said Young. “Regardless of what it means for the Fed, ultimately you’re buying a stream of earnings and you want to see the economy doing well.”

Federal Reserve Bank of Atlanta President Dennis Lockhart also helped allay investors’ concerns that the central bank was poised to stop the stimulus.

He told Bloomberg Television Monday in an interview that Fed officials remain committed to the stimulus program.

The S&P 500 index climbed 9.68 points to 1,640.42, up 0.6 percent. The Dow Jones industrial average rose 138.46 points to 15,254.03, a gain of 0.9 percent. The Dow got a boost from Merck, which rose 4 percent.

The Nasdaq composite, which is heavily weighted with technology stocks, rose 9.45 points to 3,465.37, an increase of 0.3 percent.