By  on January 3, 2011

Aided by stores’ recovering sales and ongoing operational discipline, as well as a flurry of merger and acquisition interest at the end of the year, retail stocks posted a 23.5 percent gain in 2010 and moved within points of their historic highs at year’s end.

Even after a 0.8 percent decline in the final week of the year, the S&P Retail Index ended 2010 at 507.79 versus its 411.12 finish in 2009. Its 52-week high through 2010 was the 514.64 reached on Dec. 7, and its 512.35 close on Dec. 21 was its best daily finish since July 20, 2007.

With their 47.2 percent gain in 2009, retail issues essentially recovered the ground they had lost since the end of 2007, which concluded with the index at 409.94. The strong gains last year brought them close to their high-water marks of early 2007, before growing problems in the housing market and rising gas prices pressured them downward. Since its June 2002 recalibration, the retail index’s highest point was the 538.50 reached on Feb. 20, 2007.

However, retail stocks sold off 31.9 percent in 2008 as the financial crisis spread and touched off the worst recession since the Great Depression.

Continuing the index’s upward trajectory in 2011 won’t be easy. Although M&A interest remains high in the wake of deals for retail firms including J. Crew Group Inc. and Jo-Ann Stores Inc., pressures on retailers will escalate in the new year. They will be dealing with more difficult comparisons than they did in 2010, and escalating costs for cotton, transportation and other goods and services are bound to force them to choose between passing along a portion of the inflationary tab to consumers, jeopardizing sales or absorbing price boosts, at the expense of margins.

Still, 2010 will be remembered as a year when an investment in retail was generally rewarded with a strong return. The 23.5 percent growth rate was more than twice the 11 percent gain of the Dow Jones Industrial Average, which closed the books on last year at 11,577.85, and 83.1 percent better than the 12.8 percent growth registered by the S&P 500. It also outpaced the Nasdaq Composite Index, up 17 percent to 2,654.05, and the strongest of the European or Asian indices, Germany’s DAX, which grew 16.1 percent to 6,914.19.

Among other overseas indices, London’s FTSE 100 was up 9 percent and the Hang Seng Index in Hong Kong rose 5.3 percent. Decliners for the year included the CAC 40 in Paris (down 3.3 percent), Tokyo’s Nikkei225 (down 3 percent) and Shanghai’s SSE (down 14.3 percent).

The three-year trend in the S&P Retail Index is up 23.9 percent, just slightly higher than the 2010 percentage gain.

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