Erase morning gains; sink to new lows on economy fears

Small-cap stocks reversed course mid-morning, sinking to fresh move lows as worries about the economy and credit crisis overwhelmed optimism about spending on technology. At 12:22 p.m. ET, the Russell 2000 (NYSE:IWM) was off 7.33, or 1.34%, at 539.23. The Dow and S&P 500 also slipped into the red, but the tech-laden Nasdaq 100 remained solidly higher, up 1.75%.

Tech stocks started out the day with a feel-good earnings lift from bellwether IBM, which provided some confidence that spending in the tech arena would not fall off a cliff amid the ongoing credit crisis. However, gains were rapidly trimmed away in techs as other index products slipped into negative territory — once again unable to sustain an opening bounce. IBM shares were also unable to build on the morning highs, up only about 1.2% after rising some 4% early on.

Investors seem concerned that even with the extraordinary measures to provide liquidity and help businesses access credit that neither the economy nor the credit crisis has hit bottom yet. And if the economy isn’t near the worst yet, it’s difficult to embrace buying equities. Some of the best researchers on the planet also are forecasting further pain on the economic front, which likely filters out to the rest of the investment world. For example, Goldman Sachs said in a research report this morning that “while the shifts may begin to turn around the acceleration in negative sentiment that has gripped financial markets, there is likely to be significant further easing around the world before we are done. In essence, we continue to believe that immediate financial risk stresses will probably begin to fade in the face of concerted policy efforts but that the more standard forces of slower growth and lower inflation will continue. We expect another 50bp cut from the Fed at the October . . .

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