Small caps crumble on jobs data, crude spike
After opening sharply lower, small-cap stocks are continuing to get pummeled mid-session by the worst jobs data this economic cycle has seen yet, rekindling concerns about the state of the U.S. economy. Crude oil gushed back to near record highs, also dragging the market lower.
At 1:18 p.m. ET, the Russell 2000 (NYSE:IWM) had plummeted 15.5, or 2.03%, to 747.77, while the Dow plunged 298.65, or 2.37%, to 12,305.80
Wall Street got a reality check this morning after the Labor Department reported that the unemployment rate jumped a shocking 0.5% to 5.5% in the month of May, the highest since October 2004 and the largest month-to-month increase since February 1986. Economists had forecast a much lower uptick in the unemployment rate to 5.1% from 5%. Non-farm payrolls clocked in at minus 49,000, which was better than the forecast for a slide of 58,000.
“In the post World War II period, every time the unemployment rate has jumped by a full percentage point in the course of a year, the economy has slipped into recession,” Steven Wood, chief economist with Insight Economics, said in an email report. “The bottom line is that jobs declined in May and the economy has clearly slipped into a mild jobs recession because the housing meltdown and credit market turmoil has spread to the broader economy. Persistent job losses will eventually pull the overall economy into recession.”
BMO Capital Markets foreign exchange strategist Andy Busch says the question is whether the survey week of May 12th captured skewed data or if the seasonal adjustment was somehow unable to correct for a surge, which accounted for two-thirds of the increase in the move from 5.1% to 5.5%.
“This month underscores that volatility and disconnect with a massive increase in job seekers as the labor force rose 577,000 and the participation rate rose to 66.2% from 66%,” Busch said in an email. “Without it, we see employment at only 5.2%. Also, the data toward the end of the month is showing that the economy is not engaging in massive layoffs nor is it in a tailspin.”
Today’s jobs data squashed hopes that the Fed may begin raising rates soon. “For the Federal Reserve, this should mean them staying on hold and the market taking back some of the rate hikes they were anticipating,” Busch said.
Adding insult to injury, oil is back on its march skyward, climbing $6.32 dollars mid-session to near record levels of $134.11 a barrel. Today’s spike comes on the heels of Thursday’s climb of roughly $5. The past two days saw a total increase of almost $12 and marked the biggest two-day jump in six years. The spike in oil comes after an Israeli official said that an attack on Iranian nuclear sites might be “unavoidable.”
Morgan Stanley analyst Ole Slorer predicted crude oil could spike to $150 a barrel by July 4.
The lackluster jobs data combined with near record crude levels, pushed the dollar to a one-week low against the euro. The ECB leader’s comments Thursday stating that rate hikes in Europe could take place soon also continued to reverberate through the currency market.
In broader industry groups, airlines, banks and hotels saw the most downside, while gold, silver and coal were two of the few industry groups seeing upside today.
In small-cap headlines, shares of Gentium S.p.A. (Nasdaq:GENT) plunged 25% mid-session after concerns about data from the Italian biopharmaceutical company’s late-stage study of its drug Defibrotide surfaced. Oil and gas company GeoResources, Inc. (Nasdaq:GEOI) plummeted 17% midday after saying this morning that it will sell 1.53 million shares of common stock in a private placement for $22.50 per share for gross proceeds of $34.5 million. Sangamo BioSciences, Inc. (Nasdaq:SGMO) swirled 16% lower midday after providing an update on its diabetic neuropathy clinical programs.
Bucking the overall downtrend, Inspire Pharmaceuticals (Nasdaq:ISPH) was up 43% midday, after the drug developer said this morning that its cystic fibrosis drug test improved the functioning of peoples’ lungs.
