Russell down as crude oil casts a dark shadow on stocks
Small-cap stocks opened lower and remained under pressure all day Friday, unable to shake off concerns about surging energy prices. The Russell 2000 (NYSE:IWM) shed 8.91, or 1.22%, to 724.10. For the week, small caps tumbled 17.07, the second-largest one-week point decline since the market bottomed early in early March.
Equities investors truly became fixated this week on the crude oil market, and with good reason. Earlier this week, crude oil futures charged past $135 dollars a barrel, and pump prices in some U.S. metropolitan areas pushed beyond $4 dollars a gallon, a sobering psychological benchmark in front of the summer holiday and driving season. Crude oil gained about 1% in value Friday, which kept equity bulls in hibernation.
Not only does the relentless rise in energy prices blunt consumer spending power, but it also raises input costs for many businesses and tightens margins. The airline industry is the current poster child for that vicious cycle, and many airline stocks were hammered again this week. The AMEX Airline Index closed out the week at new lows, and is trading just above $18, compared with a peak in January 2007 above $66. A powerful glimpse of that slide can be seen in small-cap stock US Airways (NYSE:LCC), which tumbled 18% Friday and is now a $4.25 stock, down from $16 in February, and a peak of almost $63 just a couple of years ago.
This morning’s existing home sales report appeared to serve up some needed good news when the headline figure came in at 4.89 million units sold, which topped the median forecast for a rise of 4.85 million units. However, the rosy headline figure came with hidden thorns, as the inventory of homes for sale swelled to record levels. “The stark inventory situation implies that additional price declines cannot be ruled out,” Asha Bangalore, economist with Northern Trust said, via email.
Volume was sparse on the last leg up of the recent rally in equities, and it has been slack during this week’s slide as well. Perhaps some investors decided to wait out the holiday weekend to reassess investment decisions. There is a sense among many traders that huge cash reserves are on the sidelines, just waiting to come into the buy-side of the market, but with the dark cloud of crimped consumer discretionary funds at the forefront, that money might instead seek safer pastures.
From a money flow standpoint, the U.S. dollar took a hit this week, sinking to three-week lows against the euro and rolling back below the 20-day moving average versus the yen, which suggests that overseas investors aren’t exactly clamoring to jump into the U.S. stock market. In addition, many market watchers see a weak currency as yet another signal that the long commodities/short dollar trade is alive and well, and that the U.S. economy remains a trouble spot.
Looking at some of the broad market sectors today, brewers were full of good cheer. While it might seem ironic that beer makers were rising into the first major cookout holiday weekend of the year in the United States, there was some news behind the move. Apparently, Anheuser Busch Companies (NYSE:BUD), is a potential takeover target from Belgian brewer InBev, as the firm is said to be putting together a $46 billion bid for the iconic American brewer. Anheuser shares jumped nearly 8% on heavy volume on the news.
With gas prices choking off spending funds, several restaurant chains appeared to be struggling today, with the Cheesecake Factory (Nasdaq:CAKE) sinking almost 6% and Darden Restaurants (NYSE:DRI) — think Red Lobster — off over 4%.
Among broad market sectors, tires and rubber, automobile manufacturers, office electronics, investment banks and department stores were all deep in the red today. The biggest upside push was in brewers, with computer hardware shares seeing modest gains.
Individual small-caps of note Friday included Hurco Companies Inc. (Nasdaq:HURC), which gapped lower on unusually brisk volume and lost over 17% following quarterly earnings news. Black Box Corp. (Nasdaq:BBOX) tumbled about 12%, also pressured by disappointing earnings news. Pacific Sunwear of California (Nasdaq:PSUN) slipped over 10% following the posting of quarterly results. On the upside, Vivus Inc. (Nasdaq:VVUS) shot 25% higher to a three-year-plus peak on positive news for its diabetic drug Qnexa.
Looking ahead to next week’s shortened activity, the market will face a much more active economic calendar, highlighted by consumer confidence Tuesday, GDP Thursday, personal income, Chicago purchasing data and the Michigan consumer sentiment report Friday. Of course, the spotlight will undoubtedly shine brightest on the weekend/Monday gyrations in energy prices. There also will be several speaking engagements next week by Federal Reserve officials, including Chairman Ben Bernanke, on Thursday afternoon.
