By  on August 17, 2009

Concerns over continued weakness at retail fermented over the weekend and whipped around the globe Monday, coming back to sour U.S. retail stocks and push the sector down 3.7 percent.

The S&P Retail Index retreated 13.23 points to 348.46, marking its steepest percentage drop since July 2. Home improvement chain Lowe’s Cos., which curtailed 2010 expansion plans Monday, weighed heavily on the sector. Retail’s declines outpaced those of the general market as the Dow Jones Industrial Average slid 2 percent to 9,135.34 and the S&P 500 was off 2.4 percent to 979.73.

Last week, retailers from Nordstrom Inc. to Urban Outfitters Inc. and Kohl’s Corp. turned in lower second-quarter earnings, consumer confidence was seen on the wane and the government said July retail sales fell 0.1 percent from June, even with the cash-for-clunkers auto incentives.

But economists said consumers need time to come back and cautioned against reading too much into any single day in the financial markets.

“People who invest in the stock market, and even worse the bond market, are not happy if they’re not worrying about something,” said James Smith, chief economist at Parsec Financial Management.

The most recent worry was the Reuters/University of Michigan report on its Consumer Confidence Index, which fell for the first two weeks of August to 63.2 from 66.

Despite the softening, Smith said retailers can’t be too tentative and need to keep stocking their shelves if business is ever to come back.

“It costs a retailer much less to have too much inventory,” said Smith. “The real merchants will make out like bandits and the bean counters will kill the people who listen to them. The rewards go to the bulls.”

Many retailers have been trumpeting their reduced inventory levels after they got burned last year, when spending suddenly ground to a near halt.

James Glassman, an economist at J.P. Morgan, said the job market is still too weak to support a consumer recovery. But that doesn’t mean stores shouldn’t be ready for one.

“The retailers who are least pessimistic are going to be grabbing the biggest share,” Glassman predicted. “Inventories are a necessary part of your business and if you don’t have the inventory you’re not going to make the sale….People who are giving up and don’t have anything or have limited offerings, you’re coming into a more difficult environment.”

Investors, however, are notoriously impatient and market dynamics can push stocks down on even a hint of trouble or uncertainty down the line.

Giving up ground in the retail world were The Talbots Inc., down 10 percent to $5.23; Coldwater Creek Inc., 9.3 percent to $6.32; Saks Inc., 8.4 percent to $5.35; Abercrombie & Fitch Co., 7.9 percent to $31.54 and Pacific Sunwear of California Inc., 7.2 percent to $3.98.

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