Lousy retail sales, slumping banks stoke sellers
Small-cap stocks got dragged through the mud again today, as renewed worries about the health of the international banking system came back to the forefront. Concerns about the financial and credit crisis clearly have spread into the consumer psyche as well, as retail sales posted a record plunge in December. The Russell 2000 (NYSE:IWM) closed down 20.61, or 4.35%, at 453.17, generating the largest one-day drop of the New Year. The market slipped to the lowest intraday and closing levels of the year and the Russell is now down 9.2% for 2009, on target to eclipse January of 2008, which tumbled 6.8% and was the worst January in at least 15 years. The Dow is now off 6.5% for the year, while the S&P 500 is down 6.7%.
The market was already on the defensive this morning following a bout of bank selling in Europe overnight. Big players such as HSBC, Deutsche Bank and Commerzbank were all hit hard heading into the U.S. session, and Citigroup Inc. (NYSE:C) picked up the selling baton with fury, sinking 22% amid worries about debt writedowns into quarterly reports, sales of assets to raise cash and a bump up in the earnings release date. While Citigroup was the most obvious whipping boy of the batch, bank stocks in general were not coping well, with the KBW Banking Index down 5%.
And into that maelstrom came this morning’s retail sales report for December. We all knew it was a crummy month, individual stores already told us that; but the market was looking for a decline of 1.2% and got blindsided with a whopping decline of 2.7% in the headline figure and a record plunge in the ex-auto sales of 3.1%. The “glass half full” crowd will note that sales were exaggerated by a huge decline in gasoline prices, but even taking that into account, it was a troubling number for an economy that is dependent on ringing sales registers.
“Consumer spending is clearly in recession, driven by accumulating job losses, falling housing prices, the financial market turmoil, and the recent seizing up of the credit markets,” Steven Wood, chief economist with Insight Economics, said in an email. “However, the sharp declines in gasoline prices in recent months have made the decline look much larger than it actually is. Nevertheless, real consumer spending fell at a 3.7% annualized rate in Q3 and appears to be falling very quickly in Q4 as well. The recession began as a housing driven downturn but has morphed into a consumer recession.”
This afternoon saw the release of the “Beige Book” update on the economy. As might be expected, the Federal Reserve said that things were not going well, with unemployment rising, housing struggling and manufacturing in a rut. In perhaps a sign that investors are getting immune to the regular wave of bad news updates, the stock market actually upticked a tad after the Beige Book release. Some of that uptick might have been sparked by President-elect Obama saying that Timothy Geithner will ultimately be confirmed by the Senate in the appointment process to become Treasury Secretary. Geithner has come under fire for not paying taxes and letting paperwork lapse on a domestic worker, which rattled some market watchers who embraced Geithner’s original appointment by Obama as the next leader of the Treasury. There were also some concerns that a difficult appointment process for Geithner could stall release of $350 billion in TARP funds.
As for the analysis of the Beige Book: “This was a very dismal assessment of the economy,” Wood said. “Business activity weakened across the board in every district. Consumer spending, tourism, capital spending, construction activity, and employment all declined and in most instances more quickly than earlier in the year. Tighter credit conditions have aggravated the economic downturn. The silver lining is that inflationary pressures have eased significantly. The report suggests that the FOMC will remain aggressively expansionary despite the low target funds rate,” he said.
Even though financial stocks were in the spotlight on today’s rout, there really was no warm and fuzzy spot to ride out the chill – at least as far as the stock market was concerned. There were no S&P sector groups up 1% on the day, but there were 10 groups with losses of 7% or more. Even agriculture firms and commodity stocks were unable to avoid the selling wave: energy shares were off 4% today, while coal, metals and mining stocks were also clobbered. About the only safe spot today was found in Treasury markets as investors took flight from riskier fare and plopped money down into Treasury markets, grudgingly accepting a yield in 10-year notes of only 2.2%.
Individual small caps making a splash today included a bevy of banks and financial firms; outside of that realm, Modine Manufacturing Co. (NYSE:MOD) tumbled 19% as the maker of heating and cooling systems for tractors tumbled back below the 20-day moving average. On Assignment Inc. (Nasdaq:ASGN) fell 18% as the human resources firm gave back a huge chunk of recent gains from the December lows.
Small cappers rising against the bearish tide included Rubicon Technology Inc. (Nasdaq:RBCN), which rallied 15% as the electronics manufacturer rose to the highest close since Oct. 24. Eagle Rock Energy Partners LP (Nasdaq:EROC), gapped higher as the firm announced plans to maintain partnership distributions and unwinding of hedge transactions.
Today’s extension of the recent slide snapped minor support along the 464 zone, but the Russell is still above more important support near 450, which marks key support for Thursday’s session. Small caps have now broken minor trendline support on daily charts from the move lows, but remain in an extended sideways consolidation mode. Decisive action below 450 is needed to suggest that a retest of the lows (or at least 416) is in order. As for Thursday’s session, the market will get another batch of economic reports to ponder, including weekly claims, PPI, the New York Manufacturing Survey and the Philly Fed Survey. Not one, not two, but three Federal Reserve officials will also deliver afternoon speeches on the economic outlook.
