Volatility is the new normal. At least so far this week.
As major indices across the globe fell, bounced back, fell again and then closed with clearly visible scars as well as fatigue, it’s clear that nothing is stable — especially the stock market.
At the bell, the Dow finished the day down 584 points, or 3.6 percent, to 15,875 while the broader S&P 500 finished with a 3.9 percent drop to 1,893. Earlier in the day the Dow fell nearly 1,000 points.
The S&P 500 Retail Industry Group Index closed the day down 4.1 percent to 1,129. Retail stocks were down across the board between 2 and 5 percent. The WWD Global Stock Tracker fell 1.9 percent to 105.11 with 83 stocks declining and 16 issues advancing. Overall, the U.S. retail sector experienced losses of between 2 and 7 percent. The lone gainer in the specialty apparel segment was Abercrombie & Fitch Co., which closed up 5.2 percent to $17.30 as investors keyed into an upgrade by Piper Jaffrey.
Monday’s declines followed a sharp drop of the Dow on Friday due to global economic concerns anchored by an increasingly weak view of the Chinese economy. Reports and blog posts over the weekend centered on the meaning of Friday’s sell-off. It was summertime and a Friday, after all, and many investors were on vacation. Trading volume was low, which makes valuations more sensitive to extremes. The market would recover, many speculated.
But in early trading Monday, the jolt was fast and furious. A different story emerged as Dow futures fell nearly 600 points. By the time the market opened, it was off by 975 points. And it bounced up and down throughout the day. The Dow’s roller-coaster ride came on the heels of steep declines in major indices in Asia and Europe.
Amplifying Monday’s mayhem — which some tagged as “Black Monday” — is lightning-speed trading and investment algorithms steered by jittery investors. More discerning is how one thing feeds into another, and there is more to macroeconomic events than meets the eye. In this most recent case, an overvalued Chinese stock market that had gone through a much-needed correction earlier this month also revealed a much softer economy in that country than previously thought, which forced policymakers there to devalue the Yuan a few weeks ago.
And that move raised questions about the U.S.’s ability to maintain export levels as well as if the strength of the all-important Chinese consumer is sustainable in the longer term. Simultaneously, companies are dealing with the ongoing, often-negative impact of a strong dollar, but while operating under low-inflationary conditions.
Add in historically low crude oil prices, gold prices that are still relatively low and stagnant wage growth, and it informs why market — and economic — stability seems like a unicorn.
Then there’s the Federal Reserve. Chairman Janet Yellen and the Federal Open Markets Committee are gearing up for a mid-September meeting that could result in an interest-rate hike. A looming rate hike translates to higher costs for businesses and consumers as well, and Wall Street loathes a hike.
Speaking of consumers, Monday’s stock market rout is just another headache for the fashion apparel and retail industries who are dealing with fickle and value-obsessed shoppers. For publicly traded firms, erosion in market capitalization could influence share repurchase programs as well as the enterprise value of the company, which could affect credit ratings. Declining stock prices could also affect mergers and acquisition deal making.
Doom and gloom headlines on news sites and across social media can also greatly influence consumer confidence. Bud Konheim, chief executive officer of Nicole Miller, compared the stock market’s precipitous drop to the weather.
“The main effect is the attitude and the emotional effect,” Konheim said. “If you feel bad that you just lost your life savings, you’re not in the mood to buy anything. But if you understand the stock market, you know that it goes up and down like the weather. Business has been normal today. The stock market is already bouncing back. It’s an emotional blip like the weather. It comes and goes.”
Scott Tuhy, vice president and senior credit officer at Moody’s Investors Service Inc., said the impact on consumers depends upon their income tier. “The concern right now is really what’s ahead for the high-end shopper,” Tuhy said. “Their portfolios may be down 5 or 6 percent, depending on where the market heads, but it’s mostly psychological for them. The aspirational shopper is a different story and more likely to limit spending.”
Tuhy said what’s occurring really fits “into the realm of regular equity market volatility. The high-end can spend from the portfolio, but that could change if they get nervous,” he said. “As for the middle class, strong stock prices weren’t helping their ability to spend on the upside. They’re still focused on their household budgets.”
With the Dow dropping 1,000 points for a moment on Monday, it’s easy to see how average Americans can become unnerved by such moves. The financial crisis is still fresh in many minds and the decline was substantial. Many consumers are already seeing steep retreats in their 401(k)s. Since May, the U.S. stock market has lost $1.4 trillion in value as of last Friday and the volatility index or VIX — also called the “fear” index — is up 100 percent in August.
Blame it on China. “It’s the popping of the Chinese market, and it may have further consequences,” explained Lawrence White, professor of economics at New York University. “Consumers may feel less wealthy, less prepared to spend.”
Many retailers and brands have pinned growth plans to the Chinese consumer and now that’s at risk. Economists are describing the Chinese economy as a bubble about to burst. Some complain that the Chinese government pulled individual investors into the market with a false sense of security and has now abandoned them. Luxury companies are expected to feel this pain of the fallout first. “If I were in luxury goods, I would be worried because people will feel less wealthy,” added White.
Indeed, among the hardest hit Monday were European entities that included key luxury firms. Kering fell 7.8 percent to 148.76 euro, or $172. 03, while LVMH Moët Hennessy Louis Vuitton, dropped 4.4 percent to 139.30 euros, or $161.33. Hermès International S.A. fell 2.7 percent to close at 305 euro, or $353.23, and Richemont lost 5.2 percent to finish at 68.85 Swiss Franc, or $73.70. Salvatore Ferragamo Italia SpA slid 6.4 percent to 23.99 euro, or $27.74, and the Safilo Group’s stock depreciated by 6.1 percent to 9.67 euro, or $11.18.
It’s noteworthy that Chinese customers account for about 30 percent of spending in the luxury sector. The luxury brands saw some initial pullback in Chinese customers as the country tried to crack down on “gifting,” but then many companies said shoppers had just headed to Europe to do their spending instead.
Economist Mike Norman said Monday’s volatile stock ride could trigger changes in the overall behavior of shoppers. “I think in the short term it could translate into consumer behavior as they pull back,” he said. “People get more cautious when the market sells off.”
Rockwell Global Capital economist Peter Cardillo echoed Norman. “People are quite jittery and nervous,” he said. He believes that the American economic data that will be coming out this week will be positive. “We have consumer confidence and housing,” Cardillo noted. “They should come in on the rosy side of the equation.”
Greywolf Equities chief technical analyst Mark Newton said Monday’s bounce and subsequent decline has caused damage that is “unlikely to dissipate quickly, and rallies into early September likely will turn out to be selling opportunities for additional weakness.”
The bloodbath started on Monday in the Asian markets, which suffered losses not seen in years. The Shanghai Composite Index lost a whopping 8.5 percent to close at 3,209 — a low not seen since 2007. In Hong Kong, the Hang Seng Index shed 5.2 percent to close at 21,251 while Japan’s Nikkei 225 dropped 4.6 percent to finish the day at 18,540.
In the fashion apparel sector, Li & Fung Ltd. lost 6.2 percent to close at 5.27 Hong Kong dollars, or 68 cents at the current exchange rate, while Luen Thai Holdings Ltd. dropped 3.9 percent to 1.24 HKD, or 16 cents. Giordano International lost 4.2 percent to finish at 4.10 HKD, or 52 cents, while Chow Tai Fook Jewellry Group shed 5 percent to close at 7.08 HKD, or 91 cents, and Trinity Ltd. declined 10 percent to close at 0.90 HKD, or 12 cents.
Jack Kleinhenz, chief economist at the National Retail Federation, urged calm in the face of the storm. “We’ve seen these things happen before, like in August 2011,” he said. “Spending gyrated a bit and uncertainty increased. I expect to see more volatility, but I don’t believe we’re going to see a big pullback. A lot of this uncertainly came about because of the situation in China, but I think there’s something of an overreaction in the fear of a global recession.”
Like Cardillo, Kleinhenz said the second-quarter gross domestic product figures are due later this week, and will be revised. “And there’s job growth,” he explained. “Unlike in 2011, when we were still coming out of the recession, the economy is well entrenched here and many people think we’re about to see signs of progress in Europe. Of course, there’s concern, but I don’t think we’ll see it translate into slower economic growth in the U.S.”
Kleinhenz called for patience and clarity of thought. He said if you look back prior to 2008, “wages were moving faster and there was greater use of credit and mortgage financing. But I think the consumer’s balance sheet today is in much better shape than it was before the recession. It’s a slow-growth stew and everyone’s wondering how to crank it up.”