Small caps power on after GDP reading

Jennifer Schonberger | Oct 30, 2008 12:14pm EDT | Comment

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Small caps continue to trade in the green midday, though off their highs of the session, after GDP was not as bad as feared. At 12:12 p.m. ET, the Russell 2000 (NYSE:IWM) was up 6.35, or 1.29% at 497.24.

Stocks are higher after a rally on Wednesday fizzled in the last minutes of trading. Trading kicked off on a positive note this morning after overseas markets rallied on the Fed rate cut and after today’s GDP report. GDP, a measure of all products and services produced in the U.S., slipped into negative territory, clocking in at minus 0.3%. The reading marked the steepest contraction in seven years and is consistent with recession readings. Despite the gloomy economic implications of the report, GDP wasn’t as bad as feared, as economists forecasted a dip of 0.5% in economic activity.

In other economic news, weekly claims figures came out and were slightly above the forecast, coming in at 479,000 versus expectations for 475,000.

“Economic activity contracted mildly in Q3 with large gains in net exports, inventory investment, and government spending being more than offset by significant weakness in consumer spending, residential investment, and business investment,” Steven Wood, chief economist with Insight Economics, said in an email. “Economic activity was also dampened in September by Hurricanes Gustav and Ike and by the strike at Boeing. However, the full effect of the credit crunch has yet to be felt. While the economy slipped in Q3 it will fall much more sharply in Q4. Our early estimate for Q4 is a decline of 3.5%.”

Consumer spending tumbled 3.1% in the third quarter, marking the first decline in 17 years. This report is yet another piece of economic data that points towards a consumer led recession. The consumer is the growth engine of the economy, as it accounts for two-thirds of economic growth; and with a soft consumer any hopes for economic recovery are short winded.

Crude oil is off $1.80 to $65 a barrel midday, while the dollar was higher against the euro and the yen. Treasuries are lower across the board midday, a reassuring sign that investors are liquidating the safest assets in favor of equities. We’ll see how long that trend lasts today/this week.

In broader industry groups, renewable energy equipment, specialty finance and marine transportation are leading industry groups, while full line insurance, paper, recreational products are all under pressure.

Exxon Mobil (NYSE:XOM) reported record third-quarter earnings of upwards of $14 billion, as the surge in energy prices in the quarter boosted the energy juggernaut’s bottom-line. The results trumped the consensus on Wall Street. Royal Dutch Shell also beat the forecast and made some $8 billion in profits.

American Express (NYSE:AXP) said it will slash 7,000 jobs, or 10% of its workforce, in an effort to cut back on spending. The credit card company also said it plans to halt increases in management salary next year and freeze hiring to save roughly $1.8 billion next year.

In small cap headlines, FreightCar America (Nasdaq:RAIL) reported robust third-quarter results on cost controls that crushed analysts’ estimates. Shares are up 12% midday. Officemax (NYSE:OMX) shares are soaring 41% after delaying its full third-quarter results to study Lehman’s impact on its business. Innospec has jumped 30% in midday trading after posting third-quarter results that trumped estimates. Conceptus(Nasdaq:CPTS) is up 42% after swinging to a profit in the third quarter.

On the downside, Iris International (Nasdaq:IRIS) third-quarter results missed the Street and the company issued full-year guidance below the consensus. Polypore International (NYSE:PPO) is cratering 40% after issuing full year revenues below analysts’ estimates, while earnings straddled the consensus.