By  on January 23, 2008

While investors on Wall Street dumped stocks Tuesday on fears of a recession, there was renewed optimism about at least one sector: retail.

The S&P Retail Index surged 5.4 percent to 394.39 as shares of retailers across all channels responded to the Federal Reserve Board's emergency — and unprecedented — interest rate cut of 75 basis points. Investors are already banking on another rate cut next week.

The much-battered retail area was, ironically, the lone star as the Dow Jones Industrial Average closed down 1.1 percent to 11,971.19, after dropping more than 460 points earlier in the day. The S&P 500 slid 1.1 percent to close at 1,310.50. The New York market declines Tuesday followed steep falls Monday on Asian and European markets.

American investors rallying to retail were betting that an economic stimulus package from the Bush administration — as well as lower rates on variable interest debt such as home equity loans, credit cards and adjustable rate mortgages — would put more cash in consumers' hands.

American Eagle Outfitters Inc. was one of the top gainers on the New York Stock Exchange, soaring 11 percent to $21.86. Women's apparel retailer Chico's FAS Inc. also rose sharply, up 13.1 percent to $7.95, while Talbots Inc. increased 7.6 percent to close at $7.51.

Valuations also jumped for department stores. After unveiling a structural overhaul of its business, Sears Holdings Corp. swelled 11.7 percent to close at $99.85. Macy's Inc. increased 5.2 percent to $24.25, J.C. Penney Co. Inc. rose 6.1 percent to $43.42 and Kohl's Corp. jumped 6.8 percent to close at $42.71. High-end retailer Nordstrom Inc. rose 8.9 percent to $32.52.

Shares of discounter Target Corp. increased 6.9 percent to $29.63, even though the company on Monday said January sales are trending at the low end of its reduced forecast. Wal-Mart Stores Inc. also jumped 3.3 percent to $49.13.

On Wednesday, analysts and economists set aside the debate of whether the U.S. was in a recession or not and replaced it with questions on improving economic conditions. Inflationary prices on consumer goods, a poor job outlook, low-wage growth and overall uncertainty in a presidential election year seemed to have sapped consumer confidence and spending, which drives two-thirds of the country's economic engine. One economist said the focus should be on the housing market.

"What we really want to do is stabilize housing by the peak spring selling season. Perhaps the most efficient way to do that is getting mortgage yields as low as we can," said John Lonski, chief economist at Moody's Investor Services. "Lower mortgage yields firm up home prices."

A mortgage yield is a measure of yield on a mortgage-backed bond. Lonski said in the past when mortgage rates plunged, prices shot up, which contributed to the current housing crisis. But he said this is what's needed to stabilize the housing market.

Regarding the financial stimulus efforts currently being employed, which should benefit the economy, Lonski said such moves "won't prevent recession, but it should shorten its stay and lessen its severity."

"In the final analysis, subpar consumer spending will persist," Lonski said.

From a broader Wall Street perspective, the Fed's rate cut may have been too little too late. At Tuesday's opening, investors were keyed into declining indices in the major financial markets on Monday, a trading holiday in the U.S. On Tuesday, the Japanese Hang Seng Index plummeted 8.7 percent to 21,757,63, reaching its lowest point since Sept. 11, 2001. Components of the index include contemporary apparel retailer Esprit Holdings Ltd., which fell 5.7 percent, and Li & Fung Ltd., which tumbled 7.2 percent. The Nikkei 225 dropped 5.7 percent to 12,573.05, a new 52-week low.

When the Fed made the rate cut announcement early Tuesday morning, investors initially shrugged off the news. The sell-off continued but slowed as trading progressed and investors weighed the emergency measure.

The London Stock Exchange's FTSE 100 declined on Monday, losing 20 percent of its value compared with the summer, but it rose Tuesday, closing up 2.9 percent, while retail stocks showed some signs of recovery. Burberry Group plc shares closed up 2.2 percent at 4.05 pounds, or $7.94, while Marks and Spencer Group plc rose 5.8 percent to 4.32 pounds, or $8.47. French Connection Group plc rose 1 percent to 99 pence, or $1.94, while Mulberry Group plc was down 1.3 percent to 1.71 pounds, or $3.35.

British shoppers seem spooked from spending by a slowdown in house prices, higher food and energy costs and the Bank of England's decision earlier this month to leave interest rates unchanged.

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