Late swoon; energy slide, safe-haven push hurts equities

Small-cap stocks finished off an up and down session with a jolting afternoon decline, as pressure from tumbling commodity stocks, weak profit reports and money flow away from equities toward credit instruments offset support from airlines and insurance companies. The Russell 2000 (NYSE:IWM) closed down 7.42, or 1.53% at 479.17 and is now down 37% for the year. Meanwhile, the Dow is off 35% for 2008, and the S&P 500 down 40%.

The market tried to stand tall through another batch of dreary economic data, but came up empty in the afternoon. The weekly unemployment claims report showed that 554,000 Americans filed for unemployment insurance last week, which might have been a drop from last week’s 26-year high, but was still a gloomy number in its own right. The four-week moving average for claims rose to 543,750, which itself ranks as the highest level in more than a quarter of a century. Data on mid-east manufacturing and leading economic indicators was predictably sour, but not a surprise.

Speaking of the economy, Federal Reserve Bank of Dallas President Richard Fisher said that the Fed “will not shy from pursuing every practicable means of supporting the functioning of financial markets and stimulating the economy back to a steady state by employing new techniques that fit the current circumstances.” What that means is that the Fed isn’t necessarily out of bullets just because interest rates are now effectively zero. Fisher said that the Fed would expand purchases of mortgage backed securities if that seems like a productive path. He also predicted that GDP would shrink 4% to 5% in the fourth quarter and that contraction was possible through the first half of 2009, with unemployment possibly rising beyond 8%. Fisher said that recent moves are starting to gain traction in credit markets but intimated that operations are still far from normal.

The yield on benchmark 10-year notes approached 2% today, reaching the lowest point in 50 years as investors continue to gobble up credit products as a safe-haven in a difficult environment for stocks. The 10-year yield (which moves inverse . . .

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