Worst daily loss of 2008; five-year lows as recession fears escalate

Small-cap stocks tumbled once again Thursday, unable to shrug off fears of an economic recession amid a global credit contagion. For the second consecutive session, the market also was unable to gain bullish traction on a promising morning rally. The Russell 2000 (NYSE:IWM) shed 47.36, or 8.67%, to 499.20, which marked the lowest daily close since Sept. 30, 2003. For the year, the Russell is now down 34.8%, while the Dow is off 35.3% and the S&P 500 is down 37.4%. The Russell has now closed lower seven consecutive sessions, and 9 of 10. In those 10 days, small caps have collapsed 29.2% in one of the most relentless and powerful bearish displays in market history.

Small-cap stocks continue to under perform the large-cap products through the teeth of this collapse. Just three weeks ago, the Russell 2000 was only down 1.6% for the year, while the Dow was down 14.1%, so the percentage loss spread between the two favored the Russell by 12.5%. Now, the difference is less than 1%. Clearly, the market has made a powerful statement that small caps are seen as more risky during a runaway bear market collapse. Small caps led the way up on the bull market move and they have been leading the way down the last 14 days of trading.

Normally, you can track money flow along asset lines. For example, the recent stock market crash has often sent money zinging into Treasury products, or gold funds for safe-haven status. Just how deep did the selling mentality run today? Stocks were down, Treasuries were down, crude oil was down, the CRB was down, even gold was down. There were no safe asset classes upon which to turn. It certainly was one of the few times one would ever see a huge decline in stocks along with a decline in Treasuries and commodities.

Once again, the market was unable to sustain buying interest despite more “good” news on the interest rate front. Overnight, several Asian central banks joined in on the rate cut frenzy, with Taiwan, South Korea and Hong Kong joining a move that saw coordinated central bank moves from the U.S., England, Eurozone, Sweden, Canada, Switzerland and even China the previous day. It didn’t save the market . . .

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