Russell closes in the red
Small-cap stocks edged lower Tuesday, pulled down by hawkish comments from the Federal Reserve that spurred concerns among investors that the next rate move might be a hike to protect against rising inflation expectations. The Russell 2000 (NYSE:IWM) lost 2.63, or 0.36%, to 732.62, the lowest daily close since May 23.
Last night, Fed Chairman Ben Bernanke said that the central bank will resist rising long-term inflation, and he intimated that the economy wasn’t too fragile to move price concerns to the forefront of policy decisions. The fear of higher rates amid a sluggish economic environment ignited a global rout on stocks and bonds coming into the U.S. trading session, and stoked stagflation fears this morning. Several other Fed officials and policy makers from around the world joined in on the anti-inflation talk, magnifying the seemingly new hard stance on price issues.
It’s quite possible that the Fed and other central bank officials around the globe are simply jawboning against inflation to see what kind of response they can illicit from the market. After all, Fed is historically loathe to raise interest rates when the unemployment rate is still rising, and it’s hard to forget the surprise 0.5% jump in unemployment to 5.5% in last Friday’s jobs data — the largest one-month percentage rise in unemployment in 22 years.
With bonds and stocks sinking this morning in the wake of Bernanke’s inflation saber-rattling, investors looked for a safe-haven within equities, and found it among Dow stocks with solid earnings. The result was that the Dow soundly outperformed the Russell 2000, and the spread between the two index products narrowed. The Russell 2000 has been charging against the Dow for the last two weeks, so a pullback in the spread is not surprising. The last time the Russell made a similar dramatic run against the Dow was in mid-March, when the market was attempting to forge a bottom.
The dollar was the direct immediate beneficiary of Bernanke’s remarks, shooting 1% against the yen to three-month highs, and gaining a whopping 200 basis points, or 1.3%, against the euro. The strong dollar helped spark a reversal slide in crude oil prices, which were up some $2 a barrel in the early going today, but shed about $4 back down to $132. In addition to the greenback tugging at shorts in crude oil, there were reports that Saudi Arabia was increasing production. Small-cap share iPath GSCI Total Return Index slipped 1.6% and is off about 4% from the record high set Friday. The iPath GSCI is a commodity index structure note product fund that tracks movement in a broad base of commodities tied to their dollar value, which means that about 75% of the index is energy-driven. The GSP is up about 33% on the year, and has market capitalization of about $333 million.
Although the intraday reversal in crude oil prices was a welcome sign for consumer, airline and auto stocks, it was still a little chilling to hear that Russia’s Gazprom, which supplies a quarter of Europe’s natural gas, predicted crude oil prices could double within 18 months, reaching $250 dollars a barrel in 2009. With gas prices in the United States climbing above $4 dollars a gallon over the weekend, consumer discretionary funds are dwindling, which is a troubling sign for an economy that is heavily dependent on spending.
Broad market sectors on the rise today were paced by soft drinks, buoyed by an analyst upgrade for The Coca Cola Co. (NYSE:KO), which played well with the safe-haven stock theme. Also, education services and homebuilders were up. On the downside, gold, coal and steel were the biggest losers.
Individual small caps of note included CompuCredit Corp. (Nasdaq:CCRT), which shed some 27% on news that the firm was being sued by regulators for deceptive marketing practices. Also, Pinnacle Airlines Corp. (Nasdaq:PNCL) gapped lower and lost some 25% on news that Delta intends to terminate a carrier connection contract with the airline. CMGI Inc. (Nasdaq:CMGI) tumbled nearly 25%, gapping lower on large volume after reporting sloppy earnings.
On the upside, HireRight Inc. (Nasdaq:HIRE) shot 44% higher, gapping higher on unusually brisk volume amid merger news. Cardica Inc. (Nasdaq:CRDC) jumped 27%, also on heavy turnover without any apparent fresh news behind the move. Independence Holding Co. (NYSE:IHC) rose nearly 14%, also without news.
Despite all the fretting that coincided with today’s stock market opening, the final tally for stocks wasn’t that bad. At one point prior to the open, S&P 500 futures were down 14 handles, but they only lost about four handles by the close. Looking ahead to Wednesday’s action, it will be interesting to see how global equity markets respond to a relatively stable conclusion to today’s U.S. stock market trading session. Last night, global stocks were swamped by a selling frenzy, with China collapsing 8.1%, Hong Kong down 4.2%, Taiwan down 2.5%, Singapore down 1.6%, South Korea down 2%, Australia off 2.7% and India down 1.1%.
In addition, there will be more Fed speakers on the docket Wednesday, but there are no major economic reports of note during the morning. In the afternoon, the beige book and Treasury budget data are slated for release, but they seldom have a marked impact on equities. The next big calendar event (outside of Fed speakers) comes with retail sales numbers Thursday morning. Looking at the chart structure for Wednesday, there is a small congestion rectangle visible on intraday charts from 728 to 738, and a breakout in either direction of the rectangle would carry a 10-handle target move, which is worth watching.
