Russell tumbles amid inflation, housing troubles
Small-cap stocks went into a tailspin on the opening as runaway inflation, weak housing starts and the never-ending credit crunch saga cast a bearish pall over the market. At 9:55 a.m. ET, the Russell 2000 (NYSE:IWM) was down 8.53, or 1.15%, at 733.44.
The inflation horizon became more troubling this morning when the Producer Price Index report came out at 1.2%, which was way ahead of the forecast for a rise of 0.6%. The headline figure marked the largest year-over-year rise in 27 years. Recently, investors have tried to shrug off inflation worries, saying that the data is back-dated and that the biggest inflation ingredient — energy — has been on the decline in late July and in August. However, today’s “core” rate of inflation, which excludes food and energy prices, was up a stunning 0.7%, which was far beyond the forecast for a rise of 0.2%. The year-over-year rise in the core rate was the fastest since 1991. Although you can argue that tracking inflation without including energy and food prices is somewhat silly, one thing the core rate shows us today is that inflation is creeping into other areas than just at the gas pump and in the grocery sack.
Rubbing a little salt in the wound was the Housing Starts report, which came out at the same time as the PPI and which also was a disappointment. The headline for housing starts was down 11.0%, slack compared with the forecast for a decline of 9.9%. The rate of July housing starts was at 965,000 units, which marked the lowest level since March 1991. So, housing starts are at 17-year lows and inflation is at 27-year lows. With many market watchers saying that a recovery in the housing market is a necessary start to a recovery in the financial/credit crisis, the numbers today did nothing to help further the bullish argument.
“With sales still soft, and with lending standards tighter, single family housing starts will contract even further,” Steven Wood, chief economist with Insight Economics, said in an email. “Housing’s contribution to economic growth will be significantly negative again in Q3.”
Large caps in the news this morning include some key retailers, with Home Depot Inc. (NYSE:HD) topping the forecast and rising ahead of the open, but quickly slipping into the red after the open. Also, Target Corp. (NYSE:TGT) reported a mild rise in profits and the stock was down 0.6%. Staples Inc. (Nasdaq:SPLS) pre-announced, saying that business was weaker than expected and the stock was hammered 8.3%. High-end retailer Saks Inc. (NYSE:SKS) posted a larger-than-expected loss and was off 6.6%.
Outside of the retail arena, NYMEX Holdings Inc. (NYSE:NMX) climbed 0.4% as the firm approved the CME Group Inc. (Nasdaq:CME) $8.2-billion purchase bid, which will further consolidate the derivatives industry. Also, analysts downgraded American International Group Inc. (NYSE:AIG), and the stock was off 4.8%.
Broad market sectors on the decline this morning included specialty stores, real estate management, consumer finance, leisure products, hotels, insurance, building products and regional banks. On the upswing, coal, thrifts, oil and gas drillers were the best performers.
Individual small caps on the move were highlighted by Neutral Tandem Inc. (Nasdaq:TNDM), which was off 10%, gapping lower to relinquish strong gains from the previous two weeks (a pattern we saw over and over with small caps on Monday). Weyco Group Inc. (Nasdaq:WEYS) was down about 8%, also retreating off move highs forged last week. Russ Berrie and Company Inc. (NYSE:RUS) was down nearly 10%, pressured by soft earnings news. On the upside, Raven Industries (Nasdaq:RAVN) was up about 4% after posting solid quarterly results.
From a chart perspective, the Russell was testing support at 734 shortly after the open, and the next key support point is at 726. A breach of the latter would endanger the recent breakout move and would also fortify a double top on weekly charts at August and June highs. On the upside, resistance will be at 748, 750 and 758 if the market can set aside the bearish mood that dominated the opening.
