Economic and Debt Fears Spook Investors, Again

The global sell-off helped the U.S. dollar rise against other currencies.

A trader at the New York Stock Exchange.

Global economic fears sparked another dramatic stock sell-off around the world Thursday.

This story first appeared in the August 19, 2011 issue of WWD.  Subscribe Today.

Retail stocks plummeted 4.2 percent amid another wild sell-off spurred on by the twin fears of another recession and the impact of shaky European debts on major banks.

The S&P Retail Index retreated 20.73 points to 471.99 as the Dow Jones Industrial Average declined 3.7 percent, or 419.63 points, to 10,990.58 — only the third close below 11,000 since October. Among the hardest hit in fashion were Abercrombie & Fitch Co., down 9.7 percent to $58.60; PVH Corp., 9.7 percent to $54.77; Tiffany & Co., 7.9 percent to $59.21, and J.C. Penney Co. Inc., 7.8 percent to $23.81.

Wall Street took its lead from overseas, where the CAC 40 fell 5.5 percent in Paris, the FTSE 100 slid 4.5 percent in London and the Hang Seng Index declined 1.3 percent in Hong Kong.

The global sell-off helped the U.S. dollar rise against other currencies. Gold rose 4.7 percent to $1,826.70, and the yield on the U.S. 10-year note fell below 2 percent as investors exited the equity markets in favor of safe havens.

The stock decline, however, was a big step back for markets, which stabilized some this week after starting off the month in free fall as the European debt crisis flared, followed by Washington’s last-minute deal on the debt ceiling and Standard & Poor’s controversial downgrade of U.S. credit.

Fears of continued economic weakness have fanned the fire. Most recently, it was Morgan Stanley that warned that the global economy was “dangerously close to recession.” The bank cut its global GDP growth forecast to 3.9 percent this year from 4.2 percent.

“Our revised forecasts show the U.S. and the euro area hovering dangerously close to a recession…over the next six to 12 months,” Morgan Stanley said. “It won’t take much in the form of additional shocks to tip the balance.”

The immediate worry is that all the negativity will cause wary consumers to pull back.

“The real concern from the last couple of weeks of market turmoil is the ultimate impact on the consumer’s psychology and purchasing habits,” Mike Calbert, head of the retail investment group at private equity giant KKR.

Walter Loeb, retail consultant of Loeb Associates and former retail analyst, said, “I still think the consumer will spend for Christmas, but consumers are value conscious and they won’t buy unless an item is on sale. Many retailers have planned sales for the season, but they will now have to sharpen their prices. Back-to-school will be weak, as people had already delayed shopping due to the hot weather and elected to buy in time of need.”

Loeb said it was too late for retailers to cut back on inventories, since orders are already coming in from China. “Retailers will have to reprice their sales and take the lower margin. That means that there will be pressure on the third- and fourth-quarter earnings results.”

And while there were also concerns about a rising unemployment rate, economist Maury Harris of UBS said, “Despite heightened anxiety about the economic outlook recently, the trend in jobless claims has not shown any sign of renewed weakness. While new jobless claims edged up a bit in the week of Aug. 13 to 408,000, from 399,000, the four-week average improved to 403,000 from 406,000 the prior week.” The four-week average is considered a better measure of trends on the labor front.