Stocks Falter as Economic Fears Creep Back

Dow falls back below 12,000, banks and commodity shares in retreat.

The relief that accompanied last week’s deal to stem Europe’s debt crisis receded Monday as investors fretted over the implementation of the rescue plan and worried anew about the global economic outlook.

This story first appeared in the November 1, 2011 issue of WWD.  Subscribe Today.

Commodity and banking stocks led market declines in both the U.S. and Europe as investors worried over slipping demand for commodities in China and increased borrowing costs for Italy, which is struggling with a heavy debt load.

The S&P Retail Index slipped 1.4 percent, or 7.36 points, to 534.53 as the Dow Jones Industrial Average dropped below 12,000, falling 2.3 percent, or 276.10 points, to 11,955.01, with a steep decline as the close approached. Among the decliners were Liz Claiborne Inc., down 5.4 percent to $8.01; Aéropostale Inc., 4.5 percent to $13.66; Macy’s Inc., 3 percent to $30.53, and J.C. Penney Co. Inc., 3 percent to $32.08.

In Europe, London’s FTSE 100 closed down 2.8 percent, Paris’ CAC 40 slipped 3.2 percent, Milan’s FTSE MIB fell 3.8 percent and Frankfurt’s DAX dropped 3.2 percent. Shares of Burberry dropped 4.7 percent, as LVMH Moët Hennessy Louis Vuitton fell 2.1 percent, Compagnie Financière Richemont dipped 4.3 percent and Mulberry fell 5.1 percent.

The International Labor Organization said the global economy “is on the verge of a new and deeper jobs recession that will further delay the global economic recovery and may ignite more social unrest in scores of countries.” The group said it would take at least five years for employment in advanced economies to return to pre-recession levels.

In the U.S., apparel retailers and vendors are looking at subdued growth at best even as higher cotton prices ease out of the supply chain.

Operating incomes at U.S.-based apparel producers are expected to rise by 2 percent to 4 percent next year, according to an analysis by Moody’s Investors Service debt analyst Scott Tuhy. Last week, the debt rating agency said U.S. retailers overall would see their operating incomes increase 2 percent to 3 percent, with apparel specialty stores underperforming the broader industry.

“The weak economy factors heavily into our outlook,” said Tuhy in his report on vendors. “We don’t expect that profit growth will meaningfully surpass U.S. economic growth. We also expect weaker economic growth in Europe, which will slow revenue growth for companies with sizable international businesses, such as Warnaco Group and Levi Strauss & Co.”

Cotton prices have fallen to about $1 a pound from $2 in April, but even while that gives producers some leeway, it doesn’t mean they’re likely to use the savings to pad their bottom lines.

“Apparel companies will pass on most of the lower costs to consumers in order to gain competitive ground, so the lift to profit margins will be limited,” Tuhy said. “The reversal in input costs should provide a hedge against downside risks for the global economy.”