Small-cap stocks continued to climb Thursday, powered by a solid performance in financial, retail and airline stocks, by yet another “good news” economic report and by a sudden downdraft in crude oil prices. The Russell 2000 (NYSE:IWM) gained 14.85, or 2.03%, to 747.79 and is now down 2.38% on the year.

Small caps were strong relative to the S&P 500 and also broke free of a close pattern they had been keeping with tech stocks. The S&P 500 was up 1.48% and is down 11.4% for 2008, while the Nasdaq was up 0.78% and is off 8.1% for the year. Meanwhile, the Dow was up 1.85% and is down 11.6% for the year.

On the financial front, investors continue to gain confidence in government-sponsored enterprises Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), which has become a source of great relief for banks, insurance firms and a host of other financial shares. FNM rose another 22% today has recovered over 50% from last week’s lows when investors were concerned that all the share equity in GSEs would be rendered worthless. A shakeup in management at FNM and talk that the firm’s balance sheets were not as bleak as feared powered the latest recovery move today.

The ripple effect throughout financials was easy to see, with the Financial Select Sector SPDR Fund climbing 3.8% and the PHLX KBW Banking Index up 4.0%. Big-name firms such as Citigroup Inc. (NYSE:C) and Bank of America Corp. (NYSE:BAC) both registered gains in the 5% range.

Some of the bullish psychology for today’s action was tied to this morning’s upside surprise on the GDP report, which came in at 3.3%, well above the forecast for a rise of 2.7%. The GDP report was just the latest in a friendly string of data surprises this week, including consumer confidence Tuesday and durable goods Wednesday. On its own merit, second-quarter GDP is somewhat dated since we’re nearly two-thirds of the way through the third quarter, but when the market is rallying, it’s . . .

For access to the full article, you must be a registered member - it's FREE.