U.S. stocks got clocked by the most April 2009 as traders ran for the hills, worried about global growth deterioration at a time in which the Fed holds off from levitating the equity market.

Consumer staples, utilities and telecoms outperformed even as they got hammered too on an absolute basis.  Basic material, energy and industrial shares led the losses.

The broad market has dropped to technical correction territory as the S&P 500 is down 11% from the April 29 three-year high.  The index has declined 9.9% over the past nine sessions, which is the swiftest move since the market was in the midst of correcting by 16% back in May 2010 (flash crash period).  Last summer the Fed saved the market from falling further by announcing QE2 was in the works.  The questions this time are:  How long do they wait?  What form does QE take this time?  And does it work for the stock market beyond an immediate bounce?  The problem this time is now that commodity prices are significantly higher than they were last year, how bad do consumers and corporate profits get clobbered by the Fed juicing the equity market(and in turn commodity prices)?

Some of this sell off is likely due to a European banking system that is troubled with all kinds of poor assets, namely PIIGS bonds.  Banks are surely selling risk assets (stocks) to shore up capital.  Those who think what’s going on in Europe won’t have meaningful repercussions here in our markets may be reassessing that thought.

Commodities got crushed along with stocks.  The CRB Index slid nearly 3% as 16 of the 19 components in this index’s basket declined.  Silver led the losses, followed by wholesales gasoline (closed down 18 cents to $2.75/gal.) and crude (off by $5 to $86.86/bbl).  Crude is down from $100 in just seven sessions.  The national retail price at the pump was at $3.70 as of yesterday’s close, but that price is going lower quick…until Bernanke re-emerges.

More below…

Market Activity for August 4, 2011

Sector Activity for August 4, 2011

The Treasury market remains on absolute fire as the yield on the two-year made a new all-time low of 0.26% and the 10-year yield slid nearly 20 basis points to 2.43%.  Needless to say, traders are running for cover.  It’s more than that though, as we’ve been talking about for a few days now, it’s the expectation Bernanke will be back for another trillion dollar-plus in bond buying.

On the European scene, the ECB halted its rate-hiking campaign yesterday (lasted a whole month as their benchmark rate was raised 25 basis points in July from the emergency level of 1.25%) as the sovereign-debt crisis rolls into Spitaly.  Beyond the troubled PIIGS, the entire Euro-zone is on the verge of recession, which certainly also prompted the ECB to hold rates at the still very low level.  Still, our bailout-centric markets didn’t like that Trichet (ECB president) turned his head to the idea of a new beefed-up bond-buying plan.   It won’t be long before he gives in and begins to buy more.

Jobless Claims

The Labor Department reported that initial jobless claims fell 1,000 last week to print smack dab at 400K (expected to come at 405K) – which means the prior week’s reading was revised up.  Remember last week we reported that initials fell below 400K (came in at 398K) to end the 400K-and-above streak at 15-straight weeks.  We also mentioned that since these claims have been revised up about 90% of the time and as a result just maybe the streak never really ended.  Yesterday morning we found that it was extended to 17-straight weeks, a sorry reality as we need to see these claims tumble to 350-365K range in order to suggest good-to-strong payroll growth.

The four-week average fell nearly 7,000 to 407,750.  This is down from 427,000 in early July, so the trend is one of improvement.  However, with debt levels and very weak real income growth that hampers this economy, we need much greater improvement than this.

Continuing claims fell after rising in the prior week.  Standard claims (covering first 26 weeks of joblessness) rose 10,000 to 3.730 million, while emergency claims (that extend out to 99 weeks) fell 42,000 to 3.718 million – these emergency claims are down two million over the past year and 500K since April.

One has to assume that the decline in emergency claims is more about benefits expiring than people finding jobs.  It doesn’t take a genius to figure this out, particularly with actual monthly job growth so weak – averaging a meaningless 22K over the past couple of months.  This is a major problem for the economy and is one of the reasons behind the slide in personal spending.

I’ll be out on vacation until August 16, David and Peter will take over until then.

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900