Instead of cramming for back-to-school sales, apparel retailers and vendors will be taking a crash course in global economic disaster this week.
The key questions all revolve around China: Will last week’s market meltdown continue? Just how bad is the economy there? Will it keep dragging down global markets? And can the rebound of the U.S. economy withstand the turmoil across the Pacific?
Already, second-quarter results from U.S. retailers have been extremely uneven with currency pressures hurting sales and with shoppers staying choosy, spending only when brands really deliver.
In addition, headlines screaming about a market crash might cause consumers to take a wait-and-see approach and be more cautious about their spending until the economic landscape calms down.
But Wall Street’s short on stability right now.
The 100-issue WWD Global Stock Tracker dropped 2.9 percent to 107.08 Friday, as the Dow Jones Industrial Average lost 530.94 points, or 3.1 percent, to close at 16,459.75, following even steeper declines on exchanges in Paris and Shanghai.
Friday also saw Standard and Poor’s 500 close below the psychologically important 2,000 level for the first time since late January, ending down 3.2 percent to 1,970.89.
This is the largest breakdown in the market since June 2013, and the S&P is now in the red year-over-year. The last time this happened the Federal Reserve pumped more money into the economy, whereas policy-makers are now weighing whether or not to do the opposite and raise interest rates.
Much will depend on what the market does this week. While some have argued that last week’s rout was summer selling without a lot of support or perhaps even computerized trading, that doesn’t look to be the case.
Jon Corpina, senior managing partner at Meridian Equity Partners, said, “We’re clearly seeing institutional selling. It’s a combination of computerized selling and human interaction.” Corpina works on the floor of the New York Stock Exchange and he stressed that he isn’t seeing fear or panic yet.
“But if the downturn continues into next week then institutions will have to step up their selling,” Corpina said. “They can’t sit on a losing position.”
Corpina said U.S. fashion and retail firms shouldn’t get too worried about their stocks, for now, because back-to-school and holiday season are on the horizon.
“Consumer spending has been moving in the right direction,” he said. Sales at the register, however, could take something of a hit if interest rates do rise, making it more expensive to borrow money.
Economist Mike Norman was also something of a voice of calm in a turbulent market.
“I see little caution flags but no major red flags,” Norman said. “I think it’s all emotionally driven and I’ve been picking up some bargains here.” He’s also been doing some selling and let go of his shares of Express Inc., for example, after holding them for a year.
Hearing market watchers use terms like carnage can be frightening. The Chicago Board Options Exchange Volatility Index — sometimes called the fear index — is up 100 percent since Tuesday. And investors are quickly jumping back into safe-haven investments such as gold, which hit six-week highs on Friday. Even U.S. 10-Year Treasury notes had their biggest gain in five months.
Investors will have several key points to focus on as the week unfolds.
First and foremost is China, whose own stock market problems have been dragging the U.S. stock market down. The government had been trying to infuse the market with capital to stem the selling, but has been largely unsuccessful.
Deep Value trader Stephen Guilfoyle said, “They are not sure if they should be supporting the market. We know their export sector is failing and they’ll probably cut the currency by another 5 to 6 percent. They seem very confused, almost contradictory, with the moves they are making.”
Peter Cardillo, an economist with Rockwell Global Capital said, “It’s all about China.”
Oil prices have been weakening as China’s demand has waned and some are starting to worry the country could be headed for an even more dramatic slowdown.
“If they have a hard landing it will impact global growth, a slowdown would impact us as well,” Cardillo said, noting that apparel and retail companies should be concerned if China slows down, but he doesn’t believe they will have a serious recession.
European markets have fallen about 9 percent in two weeks. The EuroStoxx 600, the broad index, plunged almost 6 percent on Friday, the biggest drop since September 2011. European leaders will be meeting on Monday to discuss the deteriorating situation in the Ukraine. Citi is warning that Greek debt relief will have to wait until after the snap elections in September, which could push the bailout into early next year.
Oil could see its ninth-straight week of falling prices. Less demand for crude is a sign of a slowing global economy. Some retailers have already hinted that oil-patch states have had softer sales due to oil industry layoffs.
Many energy companies have said they wouldn’t be overly worried unless oil went below $40 a barrel, but that happened for the first time since 2009 on Friday after the Baker Hughes rig count showed an increase in drilling rigs.
The week also brings quite a bit of housing data. On Tuesday, the new homes sales report will more than likely show that purchases rebounded and home prices have probably climbed faster due to the increased demand. Pending home sales come out on Thursday and are expected to have increased.
Several in the apparel industry have suggested that as people spend more on their shelter costs, there is less money for their fashion purchases. Consumer confidence reports will also come out and expectations are for gains following July’s drop. Positive economic reports could bring the emotional boost buyers’ need.
The spotlight is also expected to turn to Jackson Hole, Wyo., where economic bigwigs will gather for an annual conference. The Federal Reserve said that Stanley Fischer, the vice chairman of the U.S. central bank will speak. That speech is expected to tip off the market as to whether rates will be increased in September or not.
Earnings season is winding down for most of the market, but there are still some big retail names due to report this week. On tap for Wednesday are Abercrombie & Fitch Co., Brunello Cucinelli, Chico’s FAS Inc., Express Inc., Guess Inc. and PVH Corp. Thursday brings Aéropostale Inc., Bebe Stores Inc., Tiffany & Co., Signet Jewelers, Destination Maternity Corp. and Burlington Stores Inc. On the calendar for Friday is Hermès International.
So far, retail earnings have been uneven and while those companies that have mentioned China generally maintained an upbeat outlook, investors will be listening closely for hints of what’s to come.