Red start to Friday on credit crunch worries, rising crude

Small-cap stocks opened sharply lower, pressured by a renewal of the credit crisis fears and reeling from a dramatic surge in crude oil that could crimp consumer spending habits and weigh on sentiment. At 9:52 a.m. ET, the Russell 2000 (NYSE:IWM) was down 4.43, or 0.62%, at 715.12.

Financial shares sparked a wave of overnight selling after American International Group (NYSE:AIG) released earnings that disappointed investors and renewed concerns about debt write-downs among financial institutions. AIG tumbled 5% on the regular opening (which was better than the overnight showing), and the largest bank Citigroup (NYSE:C) was basically flat — also not as bad as overnight action — as the CEO spoke at an investor meeting.

There also was talk of asset allocation plays being back in vogue this morning, with investors shifting money away from equities and into treasury products. The old stock market adage “sell in May and go away” appeared to have a life this first full week of May trading.

In a Goldman Sachs research report released overnight, analysts say that the underlying shock of mortgage credit defaults is large and “still has a ways to go.” Although they say that some of the markets that have been beaten down will normalize and create positive spillover on sentiment in the broader economy, they said that excess housing supply, acceleration of home price declines and over leverage in the U.S. housing market will not go away anytime soon.
 
“We believe that such losses (from over leverage) imply further adverse surprises for balance sheets in parts of the financial sector, with correspondingly adverse effects on lending and economic activity. The focus of the pain is likely to shift away from subprime mortgages, where the markets are already discounting very large losses, to other residential mortgage debt, including prime mortgages. This is one reason why we are expecting a renewed slowdown in economic activity after the stimulus-fueled bounce in mid- to late 2008. In turn, it makes us fairly confident that . . .

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