Retail stocks tumbled 1.4 percent Wednesday — the sector’s biggest fall since November — as investors’ faith in the nascent economic recovery was shaken by speculation that tighter lending standards in China could slow a rebound.

This story first appeared in the January 21, 2010 issue of WWD. Subscribe Today.

The S&P Retail Index dropped 5.58 points to 406.24 as the Dow Jones Industrial Average sank 1.1 percent, or 122.28 points, to 10,603.15. Investors in the U.S. and Europe followed the lead of their Asian counterparts, who were rattled by fears that Chinese officials would begin applying the economic brakes.

Paul Nolte, managing director at wealth management firm Dearborn Partners, said the market faces significant changes beyond the lending practices of Chinese banks.

“Last year was the bottom, and if we’re not better off…if we’re still bouncing along the bottom here, it’s going to be very hard for a lot of the retailers and a lot of businesses in general to see meaningful earnings growth over the next year or so,” he said.

Nolte described the profit gains made through expense cuts as “temporary growth” that was not economically driven.

“If you don’t sell more stuff, you ain’t going to make more,” he said.

Although equities, which were at a 15-month high, could rise further, Nolte said stocks might also face a 30 percent correction over the next year or so.

There were indications Wednesday that retailers now have a sturdier footing, although a stock decline could again set them off balance. Standard & Poor’s issued a report on North American retailers indicating that fundamentals and credit ratings should stabilize this year.

“As we enter the new year, the economy is still weak, the housing market remains very depressed and the jobs situation is still bleak,” S&P debt analyst Gerald Hirschberg wrote in the report. “However, there are some signs that the future could be brightening. The stock market has shown a strong recovery and consumer confidence appears to be improving.”

The report noted that many retailers successfully adjusted loan agreements to win additional breathing room. Companies were also cautious about how they spent their money. “This should bode well for free cash flow in 2010 and allow issuers to better maintain credit ratios,” Hirschberg wrote.

In overseas markets, Shanghai’s SSE Composite Index fell 2.9 percent to 3,151.85 Wednesday after media reports in China that some banks would curtail lending in an effort to get that nation’s heated economy to cool off, according to Xinhua, the country’s official news agency. China’s top banking regulator, Liu Minkang, denied the reports but said the country’s overall credit growth would be restricted this year compared with 2009.

In Tokyo, the Nikkei 225 closed down 0.3 percent to 10,737.52 and Hong Kong’s Hang Seng Index was off 1.8 percent to 21,286.17. In Europe, the CAC 40 was off 2 percent to 3,928.95 in Paris, and London’s FTSE 100 shed 1.7 percent to 5,420.80.

A decline in U.S. housing starts also amplified fears of a slow recovery, as did investors’ reads on earnings reports from Bank of America, Wells Fargo and Morgan Stanley.

Among the U.S. stocks hit hardest by Wednesday’s contraction were Quiksilver Inc., off 6.1 percent to $2.31; Zale Corp., 5.9 percent to $2.85, and American Apparel, 4.6 percent to $28.79.

Polo Ralph Lauren Corp. was among a small group of issuers posting gains, rising 1.9 percent to $86.40. (For more on stocks, see page 14.)

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