Small caps slump on familiar themes

Small-cap stocks started out the final week of this year’s trading on a somber note, as familiar worries about the economy, spending and the credit crisis sparked selling from a holiday-reduced pool of investors. A decline in financial, retail and homebuilder shares was more than enough to cancel out gains for commodity stocks, especially since much of the rise in commodities was fueled by safe-haven and risk bid flows—and not by improved fundamentals. The Russell 2000 (NYSE:IWM) shed 10.61, or 2.23% to 466.15, and is now down 39% for 2008. Meanwhile, the Dow is off 36% and the S&P 500 is down 41%.

Investors were leery of risk for much of today’s session, which was reflected in the poor performance in small-caps relative to large-cap issues. In addition, flight-to-quality flows were prevalent in commodities and credit instruments, further underscoring the risk-averse mentality in play.

The Treasury auctioned off $27 billion in six-month bills Monday, and the result was the lowest yield in history on auctions that date back to the 1930s. Yields on six-month bills were going for about 5% back in August 2007; today’s high yield was 0.25%. The yield on benchmark 10-year notes took a modest dip today, which reflects demand for the underlying product (yields move inversely to price). In addition to the slide in stocks, safe haven buying in Treasuries was likely spurred by a rise in Middle East tensions, but that push appeared to taper off noticeably in the afternoon.

A big news event on the large-cap front actually sent a chilling ripple effect ...

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