Stocks plunge despite bank plan, Senate stimulus approval
Small-cap stocks collapsed Tuesday as investors worried that a new plan to rescue a teetering banking system might be “too little, too late” to stave off a deepening recession or unclog credit lines. Even a one-two punch of a new bank plan coupled with Senate approval for a massive $838 billion stimulus bill wasn’t enough to bring cheer to worried investors. The Russell 2000 (NYSE:IWM) closed down 22.17, or 4.74%, at 445.77, giving back most of last week’s hard-fought gain in breakneck fashion, while generating the second-largest one-day decline of 2009. For the year, the Russell is now off 10.7%, while the Dow is down 10.1% and the S&P 500 8.4%.
Going into today’s trading the market was clearly focused on a bevy of events coming out of Washington, including the Treasury Department’s official unveiling of the bank rescue project; the Senate vote on the stimulus package and testimony from Federal Reserve Chairman Ben Bernanke before the House Financial Services Committee. Apparently, it was three strikes and the market was out for today’s big events, but clearly the dominant force was the initial selling wave triggered after the bank plan was formally announced by Treasury Secretary Timothy Geithner.
Was it simply a case of “buy-the-rumor, sell-the-fact” selling from investors who had previously bid up bank stocks ahead of the news, or was there a deep-seated disappointment about the plan? “I think there was a little of both, but the biggest thing is that investors are worried that the current problems are just too big to fix quickly by having taxpayers absorb the risk from banks on their toxic holdings,” one veteran trader told smallcapinvestor.com.
As for the Senate’s long-awaited okay on the stimulus program there will still be a process in which the Senate’s bill and a House version signed two weeks ago will be meshed out together before a final bill is presented to President Obama to be signed into law. For the most part, investors have viewed the stimulus package as more of a long-term recovery tool than an immediate panacea for the economy or the stock market.
And finally, Bernanke said that financial markets were frozen over about the economy and hinted that there was a risk for stagflation if the banking system is not fixed and that the central bank has been forced to used emergency authority that was not utilized since the 1930s. In short, nothing Bernanke said was seen by investors as a reason to gobble up stocks – at least not today.
With investors fleeing stocks today and scrambling for safe-haven outlets, money clearly moved into Treasury products. However, commodity markets took a beating, with the Commodity Research Bureau Index tumbling 2.5%, with crude oil futures tanking 5%. Crude oil futures in New York eventually closed down 5.5%, or $2.21, to $37.35 a barrel and energy stocks actually kept pace with the overall market indices, sinking some 4.5% on the day.
As you might suspect given the focus on bank rescue news today, bank stocks were the worst performers today, with the KBW Banking Index tumbling 13%. Regional banks, just a day removed from being the star of the show, were back in the doghouse today as the worst performing S&P group. Small-cap regional banks taking a hit today included First Horizon National Corp. (NYSE:FHN), down some 17%; Fifth Third Bancorp (Nasdaq:FITB), down a whopping 23% and Marshall & Ilsley Corp (NYSE:MI), tumbling nearly 26%.
But that’s not to say that all the blood-letting today was focused on financial and energy stocks. In fact, in a very rare occurrence, almost all of the S&P sector groups were in negative territory today. Even gold, which was getting a lift into mid-session on flight to quality plays, couldn’t hold above ground, with the Gold and Silver Index tumbling 1.7%. Homebuilders, which we’ve been watching a potential key leading indicator for a recovery, were pummeled as well, with the ISE Homebuilders Index falling more than 9%. Small-cap homebuilder Centex Corp. (NYSE:CTX) shed 13%, while Meritage Homes Corp. (NYSE:MTH) fell some 12%.
From a charting standpoint, today’s collapse affirmed the staunch resistance approaching recent highs along 474. In addition, the slide back below the 450 swingline was a disconcerting development. Persistent price action below 450 would suggest a potential retest of the November lows and would delay breaking away from this elongated consolidation trading zone.
Looking ahead to Wednesday’s session, investors will likely remain fixated on trying to decipher whether or not the latest developments out of Washington are enough to stabilize financial firms and jump-start a receding economy. The data front is fairly quiet, with weekly mortgage applications in the morning, along with international trade data ahead of the open. The trade data often sparks a big move in foreign exchange markets, but seldom in equities. Later in the morning, a couple of Federal Reserve officials will be out on the speaking circuit.
