August may be over, but the bleeding on Wall Street continues.
Stock markets across the globe suffered steep declines Tuesday as investors fretted over economic weakness in China that is spreading like a virus. A soft manufacturing report out of China revealed weakness not only in Asia (including South Korea), but in Europe and the U.S. as well — stoking fears of a global economic retreat.
As a consequence, the Dow Jones Industrial Average plunged 470 points, or 2.8 percent, to 16,058 while the S&P 500 fell 3 percent to close at 1,913, and the Nasdaq dropped 2.9 percent to 4,636.
In Europe, all the major indices closed down sharply. London’s FTSE 100 shed 3 percent to close at 6,058 while Spain’s IBEX 35 lost 2.6 percent to finish at 9,992. Frankfurt’s DAX 30 lost 2.4 percent to close at 10,015, which is on top of a 7 percent decline for August. The French CAC 400 fell 2.4 percent, and the Stoxx Europe 600 fell 2.7 percent to 352.
In Asia, the Shanghai Composite Index fell 1.2 percent to 3,166 while Hong Kong’s Hang Seng Index dropped 2.2 percent to 21,185 and the Nikkei 225 in Tokyo fell 3.8 percent to 18,165.
In the U.S., the S&P 500 Retailing Industry Group lost 3 percent to close at 1,158. The WWD Global Stock Tracker also fell sharply, dropping 2.4 percent to 104.41. Individual retail and related stocks experienced declines of between 1 and 5 percent.
Some of the notable decliners in the fashion apparel, retail and beauty segment included Quiksilver Inc. with a 3 percent drop to 42 cents. Christopher & Banks Corp. fell 8 percent to close at $1.61 while Bebe Stores Inc. lost 7.3 percent to finish at $1.27. Nike Inc. dropped 2.8 percent to close at $108.63 and Avon Products Inc. declined 8.5 percent to $4.75.
Bon Ton Stores Inc. declined 6.3 percent to close at $3.74. Earlier in the day, Imperial Capital’s Mary Ross Gilbert reduced her price target on the stock from $4 to $2, but maintained an “underperform” rating. Imperial Capital is maintaining its “buy” rating on the company’s secured notes.
Aside from the broader, global economic concerns, the so-called “headline effect” on consumers is making matter worse. A barrage of negative headlines — whether it was the Asian slowdown, the Greek bailout or the huge market swings — all seem to be weighing more on the U.S. consumer. As a result, retail reports for last week showed a consumer that seemed to be taking a break from back-to-school shopping. The drop follows a recent report that consumer confidence is easily manipulated by dire news.
Weekly retail sales — or the Johnson Redbook Index — for the week ending August 29 showed a 1.3 percent decline from the prior week. The Goldman Sachs Weekly Chain Store Sales Index was also down 0.1 percent for the week ended August 29. The SPDR S&P Retail ETF dropped 1.4 percent to 92.23.
“On a year-over-year basis, sales rose by a slower 1.9 percent relative to a 2 percent gain in the prior week,” said Michael P. Niemira, chief economist of The Retail Economist LLC, who compiles the Goldman Sachs report. The deceleration may be due to spooked consumers who are getting fatigued by gloomy headlines. Still, that doesn’t mean people have stopped shopping.
“The overall retail industry sales pace softened in the final weeks of August as the stock market faced some weakness and volatility.” Niemira said in the report. “However, lower gasoline prices have been supporting second-quarter discretionary spending on vehicles and at electronics, jewelry, and home furnishings and furniture stores.”
Analysts expect companies reporting monthly comparable-store sales on Thursday to report strength in the categories mentioned by Niemira. And don’t count apparel out. Analysts at Telsey Advisory Group said overall, second-quarter results from specialty apparel retailers have been better than expected.
“On balance, second-quarter reports have been solid, setting the stage for momentum into the third quarter, in our view,” the Telsey analysts said in their report. “Overall, the specialty retail earnings season, while not a success across the board (and reported through a period of record market volatility), was solidly better than expected, taken as a whole.”
The analysts said quarterly same-stores sales reported by the specialty apparel sector have seen an average gain of 70 basis points above consensus estimates — with American Eagle Outfitters Inc., Guess Inc. and Express Inc. as the notable standouts. The results reveal an increasing amount of evidence that apparel sales are staging a possible comeback after a long slump.
The Thomson Reuters Same Store Sales Index is pegged to post a 0.2 percent decline for August same-store sales, which is “significantly weaker than August 2014’s robust 4.8 percent result,” the firm said. However, the specialty apparel segment is expected to see a 0.8 percent gain. Excluding comps for Gap Inc., the segment is looking to post a 2.3 percent gain — outpacing other retail market segments.
“Overall, it appears to us that newness in the assortment is driving some traffic, while better inventory planning and execution is leading to better [average unit retails] and less promotions across the group,” the Telsey analysts said in their report Tuesday. “In our view, a solid performance in the second quarter can lead to sequential momentum into the third.”
There are concerns, though, on Main Street. Consumers who have become accustomed to lower gas prices saw the price of crude oil jump 30 percent in just three days. Oil had plunged below $38 a barrel, but then skyrocketed to above $49. On Tuesday, oil careened back down another 7 percent to $45 a barrel.
On Wall Street, investors are still unsure if the Federal Reserve will raise interest rates. That uncertainty is creating an added layer of volatility. This past August was the worst month overall for stocks in three years and the worst month for the Dow Jones in 17 years. There have been only 11 times that the S&P 500 has dropped more than 5 percent in August and when that has happened, 80 percent of the time September has followed through by losing 4 percent.
John Hussman of Hussman Funds noted, “We fully expect a 40 to 55 percent market loss over the completion of the present market cycle. Such a loss would only bring valuations to levels that have been historically run-of-the-mill. Investors need not expect, but should absolutely allow for, a market loss of that magnitude.”
For Tuesday’s declines, the concerns were centered by the data coming out of Asia, which demonstrated an even sharper slowdown than most expected. The Purchasing Managers’ Index in China fell to 49.7 in August, the weakest amount in three years and the Caixin China Manufacturing PMI dropped to 47.3, the lowest since March 2009.
Caixin called the decline “the most marked contraction of output since November 2011” and noted that companies had reduced their purchasing activity “at the fastest rate since March 2009.” He Fan, chief economist at Caixin Insight Group, commented: “Recent volatilities in global financial markets could weigh down on the real economy, and a pessimistic outlook may become self-fulfilling.”
In South Korea, exports declined the most in six years, with exports dropping 14.7 percent in August from last year. The drop was due to the slowdown in China, plus fewer exports to Europe and Japan. South Korea is the first country to report its monthly trade data and is seen as a barometer of global trade. A quarter of all Korean exports go to China, so it’s a good indicator of how the Chinese economy is truly faring.
Not surprisingly, the euro zone manufacturing growth data was lower in August as well, but still not to be considered in contraction. The same cannot be said for the U.S.’ northern neighbors, the Canadians. Low oil prices have dragged the Canadian GDP to negative 0.5 percent; putting that country back into recession.
Michael Montgomery, U.S. economist at IHS Global Insight, said the August reading of the manufacturing index reflects global moderation of the economy. “Breaking out of the malaise will take time for inventory and foreign trade drag to lessen,” Montgomery said.
“Prospects that U.S. manufacturing will revive before 2016 dawns are slim. The service side of the U.S. economy is faring far better than manufacturing and is keeping final demand for goods growing, but that growth is offset by the twin drags of foreign trade and inventory restraint,” he said.
For the balance of the current year, Montgomery expects a “bumpy ride in manufacturing, but prospects for advances much better than tepid are about as remote as prospects for anything worse than transitory declines — U.S. manufacturing is just stalled.”