As the calendar approaches the midyear mark, Wall Street has a lot to chew on as investors strategize for the second half.
And for those investors in the retail, apparel, luxury and beauty sectors, broader economic conditions and consumer sentiment will clearly be top of mind.
In the short term, concerns over Greece’s debt and the direction of negotiations with the country’s creditors can steer stock prices in either direction this week. Analysts note that if Greece can reach an agreement soon, it will be an extension of the current bailout. For investors, this provides enough stability for their algorithms to cool the volatility this issue has caused in the market.
Meanwhile, the bubblelike burst of Chinese equities may be a boost to other markets as money is diverted from stocks in China to other exchanges in Asia or even abroad. After months of heady gains, stocks in China suffered steep declines last Friday with major indices dropping more than 7 percent. Analysts noted the declines were due to a correction in an overvalued equity market, which has been bolstered by stimulus policies by the Central Bank of China.
The Shanghai Composite Index fell 7.4 percent to 4,192 while the Shenzhen Composite lost 7.9 percent to 2,618. The declines were on top of double-digit losses over the past week. The less volatile Hang Seng Index shed 1.8 percent to closes at 26,663.
Despite the washout, U.S. stocks ended Friday mostly up. The WWD Global Stock Tracker finished up 0.5 percent to 114.64. For the month, the tracker is up 0.7 percent with 55 of the 100 component stocks maintaining gains.
The S&P Retailing Industry Group closed the day flat at 1,157 while the S&P 500 shed 0.03 percent to finish at 2,101. The Dow Jones Industrial Average gained 0.3 percent to close at 17,946. For the week, though, both the S&P 500 and the Dow lost 1 percent each.
On deck this week, global investors will be eyeing three reports out of Europe: the business climate report; the consumer confidence indicator, and the economic confidence indicator. All three are due for release on Monday. On Tuesday, the U.S. consumer confidence report is released, and investors are looking for signs of an uptick. On Thursday, the U.S. unemployment numbers are released and economists are pegging the rate to be 5.4 percent, which would be down from May’s 5.5 percent unemployment rate.
One caveat is that economic strength in the U.S. — such as a favorable unemployment report — could force investors to flee stocks because it could mean an interest rate hike sooner than later.
For investors of retail issues in particular, consumer confidence is a key factor. If that confidence translates into spending at retail, stocks in the sector could get fired up. Last Friday, the well-respected University of Michigan Consumer Sentiment Index showed a gain of 5.4 points in June — reaching a measure of 96.1, which is the highest reading since January. So, at this juncture, the retail outlook appears brighter than it has in prior months, and the National Retail Federation is hoping the upcoming Independence Day sparks spending.
“The busiest half of the year for retailers is about to begin, and with economic conditions swaying in consumers’ favor more so this year than last, many seem eager to take advantage of retailers’ promotions,” said Matthew Shay, president and chief executive officer of the NRF, in a statement.
From an investor’s perspective, retail promotions is a tricky balancing act that can send retail stocks plummeting if markdowns are too steep and profits are compromised. Meanwhile, if promotions are not robust enough, retailers get stuck with bloated inventories, which cost money and can also send a company’s stock into a spiral.
In a store-visit report from Telsey Advisory Group, companies seem to be striking the right balance — at least for the specialty apparel retailers the analysts checked in on. “One key takeaway from our store visits this past week is that many retailers are currently running semiannual sales to clear out summer inventory ahead of the arrival of new merchandise flows,” the analysts said. “June is typically a clearance month for retailers ahead of the arrival of transitional floor sets. Overall, shoppers were focused on taking advantage of any sales and markdowns with those areas of the store attracting the most foot traffic. Most discounts were up to 50 percent off select items.”
But how are consumers feeling? IHS Global Insight economist Chris Christopher said consumer optimism bodes well for retailers. “Increasing levels of consumer sentiment assist spending on large ticket items and clothing,” he said, referring to the University of Michigan report. “Our consumer spending outlook for the third and fourth quarters is relatively upbeat. This is good news for retailers as they approach the back-to-school shopping season and start planning for fourth-quarter holiday retail sales.”
The University of Michigan data follow a report this past week revealing a surge in consumer spending for May. The data from the U.S. Department of Commerce showed that the so-called “fuel-savings dividend” is trickling into the market. The department’s Bureau of Labor Statistics said consumer expenditures rose 0.9 percent in May — the largest gain since August 2009. Personal income rose 0.5 percent, which was the same gain in April, while disposable income increased 0.5 percent, which compares to a 0.4 percent increase in the previous month.
The personal saving rate — measured by the BLS as personal savings as a percentage of disposable personal income — was 5.1 percent in May, compared with 5.4 percent in April. May’s data support prior reports that consumers are spending more money as income increases.
Still, consumers are not necessarily doling out cash for fashion apparel — at least not yet. Big-ticket items such as cars and appliances performed better in May than apparel. Christopher said the savings realized at the gas pump are “starting to show up in relatively more robust consumer spending growth…and this report indicates that there is some momentum building on the spending front.”
Globally, the picture is also brighter than it has been in prior quarters. After experiencing softness earlier this year, the global economic outlook is showing more strength and is expanding at a “moderate pace,” according to the latest read by IHS’s economists.
This is good news for fashion apparel retailers, luxury firms, beauty companies and other industry players who have been experiencing weaker sales in key markets, and the negative impact of a strong dollar as well.
Nariman Behravesh and IHS senior research director Sara Johnson wrote in their June report that global real gross domestic product growth should “slow from 2.7 percent in 2014 to 2.6 percent in 2015 (mostly because of a temporary, weather-related and trade disruption slump in the U.S. economy in the first quarter), before picking up to 3.3 percent in 2016.”
The economists noted that for “many of the world’s developed economies, the basis for a solid and gradually accelerating recovery remains in place.” In Europe, “growth is improving, despite storm clouds,” the researchers stated, adding that real GDP gained 0.4 percent in the first quarter with “notable improvements in Spain and France. Consumer spending accelerated in the first quarter, as lower energy prices boosted purchasing power.”
The report went on to state that “investment growth strengthened in a number of countries [in Europe], helped by easing credit conditions and rising business confidence.”
In the U.S., a weak first quarter was followed by a rebound, and real GDP is “set to increase at rates of 2.1 percent in the second quarter and 3 percent in the second half.” The economists said the “strong 280,000 payroll job gain in May is confirmation the first-quarter slump was an anomaly. Consumer spending will remain the mainstay of the economy, and housing construction will also contribute to growth. The major drag on growth will come from net exports, because of a strong dollar.”
And despite a recent bottoming out in the Chinese stock market, there are “early signs of stabilization, as stimulus takes effect,” the economists said adding that Chinese “authorities have undertaken fiscal and monetary stimulus measures to boost growth and to alleviate the drag from high debt levels.”