Russell plunges 6%, as recession fears grip small caps
Small caps have plunged this afternoon, as recession fears have gripped stocks. Already concerned about still frozen credit piping, a slew of lackluster economic data and a sobering speech by Fed Chairman Ben Bernanki only served to push the market lower. At 2:36 p.m. ET, the Russell 2000 (NYSE:IWM) was down 34.81, or 6.28%, to 519.99.
A ghastly retail sales report, hit equity markets hard this morning, causing traders to keep their fingers on the sell button. September retail sales plunged 1.2%, which was nearly double the forecast for a slide of 0.6%. This marked the largest one-month decline since August 2005. Even worse, this was the third consecutive month retail sales have fallen, which hasn’t happened in more than 17 years. With two-thirds of the U.S. economy driven by consumer spending, the plunge in retail sales signals to the reality of a consumer led recession.
Adding to the grim economic picture, factory activity in New York slumped in October, with the NY Manufacturing Survey down 24.6% to the lowest reading in some seven years.
Also, on the economic docket today, the producer price index, a measure of wholesale inflation, wasn’t nearly as dismal. The headline figure for PPI met the forecast at minus 0.4%. “Although the core component is a little worrisome, lower commodity prices and the firmer tone the USD is taking should restrain costs in the year ahead,” BMO Capital Markets economist, Jennifer Lee wrote today.
Ahead of the opening this morning, the MBA Mortgage Application Survey rose 5.1% as mortgage rates slipped; however, purchase activity remained near seven-year lows.
The economic data overshadowed corporate earnings this morning; however they are likely to steel back the lime light as earnings season progresses. Tech bellwether Intel (Nasdaq:INTC) posted better-than-expected results, as did soft drinks giant Coca Cola Co. (NYSE:KO) and Wells Fargo (NYSE:WFC). However, Delta Air Lines (NYSE:DAL), JP Morgan Chase (NYSE:JPM) and St. Jude Medical (NYSE:STJ) all reported disappointing numbers.
Though credit spreads are deflating marginally, the credit crisis continues to weigh on investors. The spreads between 3-month Libor and to 3-month OIS are lower. Additionally, the TED spread has eased since its peak on Thursday. “These are good signs that the credit crunch is starting to ease off, but the spreads are still at extreme levels,” Andy Busch of BMO Capital Markets said in an email. “So far, no indication that investors want to extend term beyond overnight yet.”
On a macro level in the near term, Gary Olson, CEO of Essa Bancorp in Pennsylvania, says he doesn’t think lending will pick up. “I think it will take a while for folks to get used to what’s transpired,” he said. “I think it will be the middle of 2009 before we’ll know whether these [government] actions will actually help. A lot of uncertainty remains with regard to bank balance sheets. Certainly the capital injections can help, but no one really knows what’s around the next turn.”
Federal Reserve Chairman Ben Bernanke spoke this afternoon at the Economic Club of New York, comparing the current credit crisis with the Great Depression. The central bank chair said the government has acted quickly in the face of the credit crisis, and will be able to restore the system more quickly and at lower costs than during the Great Depression. However, he warned it will still take time for the economy to recover. “We are well positioned to move forward," he said. "Our strategy will continue to evolve ... we will not step down until we repair our financial system.”
“Since the credit crunch is ongoing, we still don't know how far and how wide this economic fire has burned,” Busch said. “These begin to give us an indication and it's not pretty. SF Fed President Yellen said the U.S. appears to be in a recession as the credit crisis bites. This becomes a question of how much each country around the globe acts to reverse the crunch and put in place policies to aid the economy.”
Crude oil is off $3 a barrel, sinking to 13-month lows, at $75 midday. Energy markets are concerned a global recession is in the making, which debilitate demand. Energy prices are often trading in lock-step with equities in recent days. The dollar is mixed against the euro and the yen, and gold is up $9 a barrel.
In broader industry groups, all are under pressure this afternoon, with metal mining, iron and steel, and oil and gas operations leading the downward spiral.
Bulk shippers are seeing selling pressure today after the Baltic Exchange’s dry sea freight index tumbled to a 5 ½-year low, as concerns burgeoned about a global recession and a deep pullback in demand for raw materials from China. Eagle Bulk Shipping (Nasdaq:EGLE) tumbled 20% midday, while TBS International (Nasdaq:TBSI) fell 12%, and Dry Ships (Nasdaq:DRYS) fell 9%.
In small cap headlines, Jones Apparel (NYSE:JNY) shares have tumbled 23% to their lowest level since 1995, after the retailer cut its forecast on soft consumer spending. Fortress investment Group (NYSE:FIG) has given up 29% midday and Ardea Biosciences (Nasdaq:RDEA) has skidded 21%.
