“Bad bank” delay sparks slide; GDP upside tainted; worst Jan. ever finally over

Small-cap stocks finished out the week with a whimper, as talk that a delay in the whole “bad bank” concept was in the mix as lawmakers struggle to define the concept. An upside surprise on GDP provided a brief bullish spark, but details within the report tainted any bullish interpretation of the news. And since GDP was still the worst showing since 1982, maybe any bullish slant on the number would have just been market spin anyhow.

For the day, the Russell 2000 (NYSE:IWM) lost 9.72, or 2.14%, to 443.53 and for the week, the Russell gave up early gains to slip for the fourth consecutive week and finished off the first month of the year with a sizable loss of 11.2%. Meanwhile, the Dow fell 8.8% in January, while the S&P 500 was off 8.5%. This marked the worst start to the year in history for the stock market.

The market started out the day with a modest upside surprise when the quarterly GDP report showed a smaller-than-expected contraction in the U.S. economy in the fourth quarter. The GDP headline figure came in at minus 3.8%, which was quite a bit better than the consensus forecast for a decline of 5.3% and some of the whisper numbers approaching 6%. The upside surprise on GDP helped provide a brief bid for stocks into the opening today, but news didn’t have legs. According to Northern Trust economist Asha Bangalore, some of that was likely due to the devil in the details.

“The minus sign for GDP growth was not a surprise but a larger decline was widely expected,” Bangalore said in an email. “The increase in inventories (+$6.2 billion vs. -$29.6 billion in Q3), which was largely unexpected, offset the weakness in demand and trimmed down the headline reading.” 

In other economic news today, the market seemed to recoil off a reading on Midwest manufacturing activity as the Chicago Purchasing Manager’s survey set a new cycle low at 33.3, which was below the forecast of 34.9. Data on the employment cost index was basically in line with expectations and tends to grab more attention . . .

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