Wall Street retreated Monday, pushing retail stocks down 0.8 percent after Standard and Poor’s cut its outlook on U.S. debt, underscoring the stakes in Washington’s debate on how to cut the nation’s looming budget deficits.

This story first appeared in the April 19, 2011 issue of WWD. Subscribe Today.

The S&P Retail Index slipped 4.33 points to 524.06 as the Dow Jones Industrial Average ended down 1.1 percent, or 140.24 points, to 12,201.59, having recovered from a nearly 250-point drop.

Although S&P said the U.S. economy was highly diversified and flexible, buttressed by the dollar’s strength as a global currency, the rating agency cut the outlook on its “AAA” credit rating to negative from stable.

“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” said S&P analyst Nikola Swann. The rating agency sees a one-in-three chance that it will lower its rating on the U.S. within two years.

From 2003 to 2008, the U.S. government’s deficit ranged from 2 percent to 5 percent of gross domestic product. But that ballooned to more than 11 percent of GDP in 2009 and has yet to recover, S&P said.

President Obama and House Republicans have laid out competing plans to lower the deficit.

“The market has been generally vulnerable to a correction,” said Paul Nolte, managing director at investment firm Dearborn Partners in Chicago. “We’re just kind of hanging with what we have at this point and seeing how things shake out.”

Nolted described the outlook for retail stocks as “OK” with money moving from luxe retailers toward stores at the lower end of the price spectrum.

Among the decliners Monday were The Bon-Ton Stores Inc., down 3.4 percent to $13.83; Saks Inc., 3 percent to $11.49, and Gap Inc., 3 percent to $21.79.

Shares of Sears Holdings Corp. inched down 0.1 percent to $78.42. Moody’s Investors Service cut its outlook on Sears’ “Ba2” corporate family credit rating to stable from positive, reflecting the retailer’s “moderating revenues and narrowing profit margins over the second half of 2010.”

Bucking the general trend, American Apparel Inc.’s stock rose 8.1 percent to $1.03 as the company searched for capital or a deal with lenders to stay afloat. The company has to show that it can continue as a going concern by April 30 or run afoul of its credit agreements.

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