By  on April 27, 2010

Consumers are starting to feel better — now it’s investors who seem to be having a confidence problem.

Retail stocks posted their biggest drop since August, falling 3.2 percent and leading the markets down Tuesday as debt downgrades for Greece and Portugal sparked fresh concerns those countries’ budget troubles could signal a larger problem for the global economy.

The worrisome signals from Europe came just as U.S. shoppers showed signs of regaining some of their faith in the economy. The Conference Board said its Consumer Confidence Index rose more than 5 points to 57.9 this month, the highest level since September 2008 and the second increase in as many months. Last month, the index stood at 52.3, and in February, 46.4.

On Tuesday, the S&P Retail Index fell 16.11 points to 481.07 as the Dow Jones Industrial Average dropped 213.04 points, or 1.9 percent, and dipped back below the 11,000 mark to 10,991.99. Shares of Office Depot Inc. dropped 21.1 percent, pushing the retail pack down as investors punished the supply store chain for weaker-than-expected first-quarter results. Fashion retailers across the spectrum declined, from Saks Inc., which fell 6.9 percent to $9.67, to Gap Inc., down 4.1 percent to $25.14.

Retail stocks are still up 17 percent this year, more than three times the pace of appreciation by the Dow, and could be heading for more declines.

“They’ve been the high flyers,” said Andrew Fitzpatrick, director of investments at Hinsdale Associates. “The retail stocks are going to end up coming down — hard to say when, but as the market has these pullbacks, I think you’ll see retail stocks pull back even harder than the market in general.”

Fitzpatrick described Tuesday as a “cooling-off period” and said investors were still trying to get a handle on Greece’s problems and what they mean.

“I don’t think it’s going to be a case of complete meltdown, but in the meantime, I think it can definitely weigh on the market,” he said. “If Greece is having problems, who’s the next one?”

The Athex Composite Index fell 6 percent to 1,696.68 in Athens Tuesday, following a ratings cut from Standard & Poor’s, which dropped its grade on Greece’s long-term sovereign credit to “BB-plus” from “BBB-plus”—a move into noninvestment or “junk” territory. The debt watchdog said Greece’s options were dwindling as prospects for economic growth weakened.

S&P also cut the rating on Portugal, noting the government there could struggle with its debt load until 2013.

The downgrades helped push the euro below $1.32, a level not seen in nearly a year. Also, the CAC 40 slipped 3.8 percent to 3,844.60 in Paris as the FTSE 100 receded 2.6 percent to 5,603.52 in London.

Investors were sufficiently spooked to push The Chicago Board Options Exchange’s volatility index, sometimes described as a gauge of the market’s fear, up 30.6 percent to 22.81.

But while the investment community attempts to get a grasp on the economies of Europe, U.S. shoppers provided a small vote of confidence about conditions on this side of the Atlantic, with a small but discernible improvement in the critical labor picture. Lingering high unemployment — officially 9.7 percent — has been perhaps the most stubborn symptom of the economic downturn.

In the Conference Board index, consumers’ appraisals of the current labor market improved, with respondents who said jobs are “plentiful” rising to 4.8 percent from 4 percent. Those who said jobs are “hard to get” declined to 45 percent from 46.3 percent.

The long-term view, as reflected in the Expectations index, was more upbeat. The percentage expecting more jobs in the six months ahead rose to 18, matching the September 2009 level, from 14.1. Those who anticipate fewer jobs decreased to 20 percent from 21.4 percent.

Maury Harris, economist at UBS, said, “The improvement in confidence was driven mainly by the gain in the key expectations component, [which] tends to correlate more closely with trends in real consumer spending growth.”

He added the “improvement extended to the labor market components, with improvement in perceptions about current and future job prospects.”

Both components of the Consumer Confidence Index improved this month, with the Present Situation reading increasing to 28.6 from 25.2 and the Expectations portion jumping to 77.4 from 70.4.

“Consumers’ concerns about current business and labor market conditions eased again,” said Lynn Franco, director of The Conference Board Consumer Research Center. “And their outlook regarding business conditions and the labor market was also more positive than last month. Looking ahead, continued job growth will be key in sustaining positive momentum.”

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