There’s no room for the weak at heart on Wall Street this year.
Plummeting oil prices, concerns over China’s economy and eroding confidence of major fund managers dealt a blow to stocks again on Wednesday, with many fashion and retail players getting caught up in the blitz of market volatility and heavy trading. The sell-off was global in scale, with major indices in Europe sinking, which followed steep declines in Asian stocks.
The Dow lost more than 560 points in midday trading and closed down 249 points, or 1.6 percent, to 15,766. The broader S&P 500 shed 1.2 percent to 1,859, while the Nasdaq dropped 0.1 percent to close at 4,471. The S&P Retailing Industry Group Index finished down 1.1 percent to 1,148. Year-to-date, the Dow has lost 1,750 points, or 10 percent, while the S&P Retailing Industry Group Index is down 9 percent.
While the day began with sharp drops across the board, U.S. retail and fashion apparel stocks were mixed by the closing bell. Among the decliners were: Destination Maternity Corp., with a 4.5 percent decline to $5.98; J.C. Penney & Co. Inc., 4 percent to $6.31; Tiffany & Co., 3.8 percent to $61.80, and Wal-Mart Stores Inc., 2.8 percent to $60.84.
There were some that were able to capitalize on the tough day and gain ground, including Bon-Ton Stores Inc., up 20 percent to $1.80; Coty Inc., 4.6 percent to $22.95; Perry Ellis International Inc., 4.8 percent to $17.62, and Dicks Sporting Goods Inc., 5.2 percent to $36.13.
But this is a market where almost no one is safe. The turmoil is yet another threat to retailers and brands that are already wrestling with deflationary pressures, a lackluster consumer, the growing importance of e-commerce and increasingly vocal investors (just ask Macy’s Inc., which is fending off activist Starboard Value, and has also attracted the attention of Greenlight Capital’s David Einhorn).
That kind of drop can limit the financial flexibility of companies and spook consumers, particularly luxury shoppers who tend to adjust their spending with the ups and downs of the market. Sales at higher-end stores such as Nordstrom, for instance, saw a big drop-off in August after China moved to devalue the yuan, sparking broader worries.
What set this sell-off apart from prior ones this month is that a lot of the volume was being done by larger investors and funds. Ron D’Vari, chief investment officer at New Oak Asset Management, said “the general reaction is to reduce leverage by selling stocks and producing cash. Certainly pension funds will reallocate.”
On the New York Stock Exchange, more than 1,300 stocks set new 52-week lows and the volume was twice the normal amount. All 30 of the Dow Jones Industrial average stocks were down. Nearly $2 trillion in market capital has been lost so far this month. And once again, cheap crude oil was mostly to blame as a source of the massive sell-off. At the bell, the price of crude oil fell 6 percent to $26.76.
And cheap crude oil is only part of the equation. Earlier on Wednesday, Merrill Lynch Bank of America’s monthly fund managers survey cited China’s economic slowdown, coupled with sinking corporate profits, as eroding the confidence of investors.
The survey, which polls more than 200 fund managers that have an aggregate of $610 billion of assets under management, also noted that these global investors have shifted their asset allocations out of equities while increasing their cash holdings. For retail and consumer discretionary stocks, this suggests the market volatility and sell-off will likely continue.
The analysts who conducted the poll said “a net 8 percent of fund managers see the global economy strengthening over the next 12 months — the survey’s lowest reading on this measure since 2012.” But that doesn’t necessarily mean they expect an economic collapse as “just 12 percent believe a global recession will occur in the next 12 months.”
“Investors are not yet ‘max bearish,’” said Michael Hartnett, chief investment strategist of global research at the firm. “They have yet to accept that we are already well into a normal, cyclical recession-bear market.”
The survey also revealed that respondents see the equity markets in Europe and Japan as better bets. “Investors’ bullishness toward Europe remains intact, but conviction is rooted to the floor,” said James Barty, head of European equity strategy at Merrill Lynch Bank of America.
IHS chief economist Nariman Behravesh said China has “rattled global financial markets again, but it will probably not drag the world economy into recession.”
“A combination of intense downward pressures on China’s equity markets and a poor policy response by Chinese officials — along with rising tensions between Iran and Saudi Arabia — spooked already-jittery markets,” Behravesh explained. “Yet, the linkages between China’s equity markets and the rest of the world are small. China’s economic pull is much bigger, especially on the rest of Asia and commodity-exporting emerging markets. The exposure of the U.S and European economies to China is still limited.”
Tell that to Wall Street. Since August when the stock market in China first collapsed, investors have used the unstable fiscal conditions and softening economy there as a reason to dump stocks. The market decline in August and the most recent one are due to China’s policymakers attempting to step back and let the economy evolve into a consumer-driven one. It hasn’t worked. So, the government has stepped back in to juice the financial sector.
Wednesday, the People’s Bank of China said it would inject more than 600 billion yuan, more than $91 billion at current exchange, into its country’s financial system to loosen liquidity ahead of the Chinese New Year holiday. The funds will be made available by providing shorter maturity loans to banks via operations, such as the standing lending facility, medium-term lending facility and pledged supplementary lending, according to a statement on the PBOC’s Web site.
The central bank has already cut interest rates six times since November 2014, and reduced the amount of cash that banks must hold as reserves, but these steps haven’t done a lot to stimulate growth.
Meanwhile, the continued decline in oil prices is wreaking havoc on global currencies, which will eventually begin to affect consumers. The Saudi riyal has been pegged to the U.S. dollar since 1986, but investors have been buying options on the currency that call for the biggest devaluation in two decades. The Saudi central bank is now warning banks about betting against the currency.
The Hong Kong dollar has been pegged to the U.S. dollar for 32 years, but contracts to buy the currency are plunging as well. Market analysts think these currencies may unhinge from the dollar similar to the way China separated the yuan from its dollar peg.
And the Russian ruble is now below levels hit during the ruble crisis in 2014. The Russian economy is very dependent on oil prices and, as a result, investors are worried about the country’s ability to weather this storm.
For retail and fashion apparel companies doing business abroad, this means more headaches and sharp pains to quarterly results.
Wall Street was also eyeing chain-store sales to see if the American economy is strong enough to withstand these negative market forces. Unfortunately, sales were soft in the Jan. 16 week. Same-store sales came in at 1.4 percent, which was lower than last year’s 1.7 percent. The report suggests that shoppers are now done with clearance sales and reverting back to basic spending.
When traders revert back to more typical ups and downs, though, is anybody’s guess.