Steep slide for stocks on econ data, Bernanke, financial woes
Small-cap stocks fell hard this morning, pulled down by soft economic data, a global rout in equities, record lows in the U.S. dollar and a sobering outlook from central bank leaders. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was down 13.92, or 2.09%, at 650.59, the lowest level seen since March.
In Senate testimony this morning, Federal Reserve Chairman Ben Bernanke will address the economy and monetary policy. In a release of the advance text, Bernanke said that the financial markets remain under “considerable stress” and that consumer spending was likely to be “restrained” in coming quarters. The immediate response to the Bernanke text headlines was that stock markets extended the morning slide.
The stock market was already taking a beating in after-hours trading before a fresh batch of economic data came out on the weak side ahead of the opening. On the inflation front, the PPI headline figure came in at plus 1.8%, which was well ahead of the forecast for a rise of 1.3% and the year-over-year figure was a sobering plus 9.2%, the largest rise since June 1981. On the consumer spending ledger, the news was also dour, with June retail sales up just 0.1%, well down from the median forecast for a rise of 0.4% as car sales notched their biggest drop in more than two years. Even when excluding autos, June sales were up just 0.8%, which also missed the forecast for a rise of 1%.
Retail sales in May were strong, and although this month’s figure missed the estimate, it was still a decent number. The problem is that May and June sales were temporarily boosted by government stimulus checks and the strength is seen as temporary from most analysts. “Despite recent strength, consumers are slowly and grudgingly succumbing to job losses, high energy prices, the housing meltdown and the financial market turmoil,” Steven Wood, chief economist with Insight Economics, said in an email.
Global investors were shied away from equities and especially the U.S. dollar in overnight action. Stock markets in Europe were down about 2% heading into the U.S. open, while markets in Asia incurred stiff declines ranging from 2.5% to 4.9%, depending on the country.
The U.S. dollar was dumped en mass as global investors decided they didn’t want anything to do with U.S. investments amid concerns about financial market stability. The greenback plunged to record lows against the euro, 25-year lows against the Aussie dollar and tumbled more than 1.3% against the yen.
As the dollar plumbed new lows against the euro, crude oil benefited, climbing toward $147 dollars a barrel. In addition to the weak dollar, crude was supported by gathering storm fronts in the Atlantic and geopolitical tension in the Middle East. Other physical markets should stand to benefit from the slide in the dollar, which makes commodity goods priced in the dollar units less expensive to foreign buyers. Gold gained status as a safe-haven against the financial market turmoil and also pushed higher.
Large caps in the news this morning included Kimberly-Clark Corp. (NYSE:KMB). Shares in the maker of Kleenex tissues and Huggies diaper products were down about 11% shortly after the opening following sloppy second-quarter earnings and as the firm slashed its yearly outlook. Johnson & Johnson (NYSE:JNJ) quarterly results topped the Street estimates on strong demand for the firm’s medical and consumer products, and JNJ stock was up 1.5% early today. Also, General Motors Corp. (NYSE:GM) was down 0.3 as the firm announced plans to suspend dividend payments and Motorola Inc. (NYSE:MOT) was off 1.1% after European analysts initiated coverage with a “sell” rating overnight. Clearly, concerns about government-sponsored mortgage firms remained in play today, with Fannie Mae (NYSE:FNM) off 11% early, while Freddie Mac (NYSE:FRE) was down a whopping 26%. Risk premiums in the debt market on agency notes widened sharply this morning, as investors favored Treasuries.
Broad market sectors on the decline this morning were highlighted once again by thrifts and mortgage finance firms. Also on the slide were diversified banks, regional banks, multiline insurance companies, diversified financial services and automobile manufacturers. Bucking the downtrend were footwear firms, biotechs and gold stocks.
Small-cap stocks on the move were paced on the downside by 1-800-FLOWERS.COM Inc. (Nasdaq:FLWS), which was down 12%, gapping lower to 52-week lows, extending a slide that has seen the stock shed 43% off the June highs. Village Super Market Inc. (Nasdaq:VLGEA) was down nearly 12%, taking back most of the bounce off last week’s fresh move lows. Infinity Pharmaceuticals (Nasdaq:INFI) was down 13%, gapping lower on news that the firm will discontinue a prostate cancer trial drug. Sonic Automotive (NYSE:SAH) was down about 9% as the firm revised its annual earnings target. On the upside, Edge Petroleum Corp. (Nasdaq:EPEX) was up almost 12% on news that the firm will merge with Chaparral Energy Inc. CSG Systems International Inc. (Nasdaq:CSGS) was up 9% on news that a contract with Comcast has been extended through 2012.
Looking at the chart picture, if the Russell sustains the slip to fresh move lows (as defined by the July 7 low at 651.93), then the breakout target from the recent consolidation comes in at 626, which is a scary thought for the bulls. Immediate support below 651.93 is at the “figure” at 650, then at the March lows at 643.35. If the market can mount a recovery bounce later today, then resistance comes in at 664 and 672.
