Recession worries, global slide powers opening downside push

Kevin Pendley | Oct 22, 2008 10:19am EDT | Comment

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Small-cap stocks fell hard on the opening, pressured by a run of weak guidance projections on recession fears from the flood of quarterly earnings reports and by a steep slide in equity markets around the world overnight. At 9:56 a.m. ET, the Russell 2000 (NYSE:IWM) was down 10.54, or 1.99%, at 520.27.

Even before we got this jolting steep opening slide this morning, it was a wild overnight ride for stock market futures. S&P 500 and Nasdaq futures saw ranges beyond 4% as the market rallied right after Tuesday’s close on solid earnings from Apple Inc. (Nasdaq:AAPL) and Yahoo! Inc. (Nasdaq:YHOO). The strong results from those firms set in motion a big run in the tech sector and even though those gains were relinquished by today’s opening, tech stocks were still outperforming the broad market, which is a switch from recent trends. AAPL was up about 6% and YHOO some 3% on the open. The Nasdaq 100 was down about 1% shortly after the open.

Another positive story on the earnings front came from McDonald’s Corporation (NYSE:MCD), which topped the forecast and rose at the opening, but is now down 1.49%. From a pessimist viewpoint, the bears will say that “Mickey Dees” is the only restaurant people will be able to afford in a prolonged recession.

Outside of the earnings flood, SanDisk Corp. (Nasdaq:SNDK) tumbled some 25% in after-hours trading after Samsung Electronics Co. Ltd. withdrew a $5.9 billion bid for the flash memory card maker. SNDK was down 29% early on.

Earlier this morning, the MBA Mortgage Application Index fell sharply, sinking 16.6% to the lowest point in nearly eight years, which underscores ongoing troubles in the housing market. Mortgage rates upticked into that survey period, which likely hurt the application activity, but with home prices not doing well, secondary mortgage activity remains soft and we already saw single-family home sales collapse to 26-year lows on last week’s economic data. In addition, there are reports that homes worth less than their current mortgages have more than doubled from last year, which raises the risk for more foreclosures and further devaluation of mortgage debt.

Debates are already underway in the economic analysis community about whether or not the U.S. economy will see a “V” or “U” shaped recovery out of the recession. A “V” shape would imply a relatively quick bounce out of the lull, while a “U” shape would imply a more prolonged slump. Paul Kasriel, chief economist with Northern Trust, said in an email that “both history and theory do not suggest a near-term surge in monetary velocity. Moreover, theory suggests very sluggish growth in the broad money supply. As a result, the odds of a “V”-shaped economic recovery are low.”

Looking at the global influence on stocks this morning, European and Asian equity markets were in a tailspin overnight, with Japan’s Nikkei sinking 6.8%, Singapore tumbling 5.2% to four-year lows and India shares off 4.8%.

The U.S. dollar continues to soar against the euro, climbing some 1.6% this morning to the highest point in about two years. The strong dollar tends to be a negative for commodities, which are often priced in dollar terms. Crude oil was certainly under pressure this morning, sinking some $3 a barrel amid worries that a global slowdown will damage the demand side of the equation.

Individual small caps on the move this morning include Kindred Healthcare Inc. (NYSE:KND), which tumbled 32% as the firm updated guidance. Foundation Coal Holdings Inc. (NYSE:FCL) was down 21% after releasing quarterly earnings.