Largest one-day swoon in eight months on labor worries

Kevin Pendley | Sep 04, 2008 4:37pm EDT | Comment

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Small-cap stocks collapsed Thursday, unable to stave off a firestorm of sellers that were ignited by fears of a global economic slowdown. Worries about Friday morning’s Labor Department release on the U.S. employment picture also stoked the flames after a private employment survey this morning came in on the weak side of expectations. In the end, the Russell 2000 (NYSE:IWM) tumbled 23.29, or 3.14% to 718.62, matching the largest one-day decline of 2008 in the process — a decline posted way back on Jan. 4.

It was a rout throughout the equity markets, with the Dow off 2.99% and the S&P 500 down 2.99% as well. For the year, the Russell is down 6.1%, while the Dow is down 15.6% and the S&P 500 is off 15.8%.

Fear definitely got the upper hand on greed Thursday, as investors bailed on stocks in favor of safer fare. Money flow into credit instruments was clearly an important theme, as the yield on benchmark 10-year notes tumbled nearly 2% to the lowest point since April. Yields move inversely to bond and note prices, which means that the price for those credit instruments was driven higher on the demand for safe-haven investments.

The market was already on the defensive overnight as equities around the world edged lower and the selling mentality heated up before the opening when the ADP National Employment Report showed that 33,000 private sector jobs were lost in August. Market watchers were looking for the ADP report to show a loss of about 20,000 jobs, so a pullback in stocks on the weaker figure was not a surprise, but the velocity of today’s afternoon descent in stocks was a jolt. Interestingly, the ADP report would seem to suggest a decline on Friday’s big Labor Department employment report of about 40,000 non-farm jobs, which would actually be better than the consensus forecast for a decline of 71,000 workers. Whatever the outcome, it should be noted that the ADP data has not been a reliable predictor of the actual Labor Department release for quite some time.

Also on the jobs front, the weekly claims report came in above the forecast at 444,000, which poured more kerosene on the selling fire. Asha Bangalore, economist with Northern Trust, said in an email that today’s increase in jobless claims indicates that softness in labor market conditions still persists and that the tally of claims and the four-week moving average are both at levels consistent with the tail-end of the 1990 to 1991 and 2001 recessions.

A separate report from the Institute for Supply Management said that non-manufacturing activity rose to 50.6 in August, which was above the consensus forecast of 49.5. However, a sub-index on the report on employment contracted to 45.4 from 47.1 and played into the dominant employment worries in the air.

At the same time these concerns were percolating, European central bankers were busy holding interest rates steady at their regular policy meeting, and their leadership seemed to be taking a dovish stance on things. The market’s perception of the ECB is one of an inflation fighter and if they are so worried about the economy that they are willing to risk rising inflation pressures, then it spells a troubling picture for other nations, too. Japan’s growth is non-existent right now and even China, which has been seeing double-digit growth seemingly forever, is talking about stimulus plans. That type of global growth shutdown won’t help U.S. multi-nationals sell products abroad and it fits with statements in recent days from tech firms that other countries appear to be reducing their spending on technology.

Once again, stock markets were unable to gain upside traction despite a weak tone in energy prices. Crude oil futures slipped 1.3%, back below $108 dollars a barrel and commodity markets in general were on the defensive, with the Commodity Research Bureau Index down 0.6%. There are some concerns that commodity declines now are tied to the global slump issue, which takes away one of rally stories for equities. The dollar soared to the highest level against the euro since December, which normally would be good news for U.S. equities, but that move was also fueled primarily by euro-zone growth concerns versus a feel-good picture for U.S. assets.

Today’s rout in stocks was remarkably broad-based. Unlike recent slides, you couldn’t blame most of the move on financials, or on commodities. Index guides on airlines, retailers, homebuilders, financials, energy, industrial, technology, banking and drug stocks all went lower

Among individual small caps, Spectranetics Corp. (Nasdaq:SPNC) was collapsing, down 47% while tumbling to fresh move and 52-week-plus lows. Trading on SPNC was halted around noon. Opnext Inc. (Nasdaq:OPXT) tumbled 18% and Blyth Inc. (NYSE:BTH) was off 26% after earnings missed the mark and the firm lowered its 2009 outlook.

Although today’s collapse in small caps was extreme, all it did was push the market back down toward the recent range lows. The Russell actually held support near 716.60, which marked the recent pullback bottom off the August highs. If small caps slide through that point after jobs Friday morning, then it would suggest we’re moving into a lower range, with something in the 690 handle as a logical key support area.