“Bad bank” delay sparks slide; GDP upside tainted; worst Jan. ever finally over
Small-cap stocks finished out the week with a whimper, as talk that a delay in the whole “bad bank” concept was in the mix as lawmakers struggle to define the concept. An upside surprise on GDP provided a brief bullish spark, but details within the report tainted any bullish interpretation of the news. And since GDP was still the worst showing since 1982, maybe any bullish slant on the number would have just been market spin anyhow.
For the day, the Russell 2000 (NYSE:IWM) lost 9.72, or 2.14%, to 443.53 and for the week, the Russell gave up early gains to slip for the fourth consecutive week and finished off the first month of the year with a sizable loss of 11.2%. Meanwhile, the Dow fell 8.8% in January, while the S&P 500 was off 8.5%. This marked the worst start to the year in history for the stock market.
The market started out the day with a modest upside surprise when the quarterly GDP report showed a smaller-than-expected contraction in the U.S. economy in the fourth quarter. The GDP headline figure came in at minus 3.8%, which was quite a bit better than the consensus forecast for a decline of 5.3% and some of the whisper numbers approaching 6%. The upside surprise on GDP helped provide a brief bid for stocks into the opening today, but news didn’t have legs. According to Northern Trust economist Asha Bangalore, some of that was likely due to the devil in the details.
“The minus sign for GDP growth was not a surprise but a larger decline was widely expected,” Bangalore said in an email. “The increase in inventories (+$6.2 billion vs. -$29.6 billion in Q3), which was largely unexpected, offset the weakness in demand and trimmed down the headline reading.”
In other economic news today, the market seemed to recoil off a reading on Midwest manufacturing activity as the Chicago Purchasing Manager’s survey set a new cycle low at 33.3, which was below the forecast of 34.9. Data on the employment cost index was basically in line with expectations and tends to grab more attention during inflationary periods than in a recession and an update on consumer sentiment was basically in line with expectations.
“Manufacturing activity fell off a cliff in the Chicago region October because of the difficulty of securing working capital lines of credit,” Steven Wood, chief economist with Insight Economics, said in an email. “Since then factory activity in this region has remained moribund. The demand for manufactured goods is extremely weak, indicating customers have gone into hibernation. The major regional manufacturing all indicate that Monday's ISM Manufacturing Survey is poised to remain solidly stuck at a deep recessionary level,” Wood said.
All in all, this wasn’t a pretty week from an economic data standpoint as a record number of people are on unemployment insurance, home sales are at record lows and the economy tumbled into the deepest contraction in more than 26 years. Everyone wants to see bad economic data as already priced into the market slide, but it’s tough to ignore when the news was as bad as it was this week. Looking ahead to next week, we’ll see another full slate of reports starting out with the ISM Manufacturing Survey on Monday and then heading into the main event – Friday’s big monthly employment release.
Of course all the economic reports and various corporate profit results marked the well defined “headline” reasons for the slide today, but the market also seemed to become uneasy with the way politics were playing out. “I don’t think the market liked the Obama Administration’s class warfare and pro-union statements. When combined with the flip-flop on the bad bank idea, confidence is being lost. Gold continues to go up, reflecting the distrust in fiscal and monetary policy,” Nick Kalivas, vice president of financial research with MF Global said in an email interview.
Kalivas also said that there is “chatter” in the foreign exchange market about the health of the euro, with ideas of an “A” euro and “B” euro being floated about in the wake of statements from billionaire hedge fund manager George Soros earlier this week questioning the euro. “The markets don’t need yet another crisis,” Kalivas said.
In addition, players who jumped on the rally Wednesday were quick to liquidate Thursday and Friday when the gains couldn’t hold up. Simply put, the buyers had a hot money mentality and weren’t going to stick around and hope they would get bailed out. Also, on rally days of late there has been some optimism about M&A activity, but with the Dow Chemical/Rohm & Haas deal falling apart and Swiss drugmaker Roche Holding lowering it’s bid for Genentech Inc. the M&A psychology is faltering, Kalivas said.
Individual small caps on the move today included Data Domain Inc. (Nasdaq:DDUP) as the data storage firm gapped lower on weak earnings news and shed some 31%. Key Technology Inc. (Nasdaq:KTEC) also had an adverse response to earnings and fell 24% as the process automation firm saw unusually heavy volume. DryShips Inc. (Nasdaq:DRYS), a bulk shipper that appears on the biggest mover list almost daily, tumbled 22% as the firm canceled plans to purchase a ship to reduce capital expenditures. On the upside, radiosurgery firm Accuray Inc. (Nasdaq:ARAY) rose 22% after reporting quarterly results.
Looking at the chart picture, small caps left a formidable double top on the highs this week on daily charts and a major “head fake” upside breakout that never had the time to get cemented. The long-term picture remains one of a market mired in a sideways consolidation, but the relatively high volatility within that consolidation makes for choppy sailing. One thing is certain, the weekly close back below 450 is a troubling development, as is the persistent sloppy price action.
