Just as fashion apparel retailing was staging what looked like a comeback, jittery investors came along and threw a wrench into the works.
Concerned over the global impact of a slowed Chinese economy, investors — many of whom had already been reducing their exposure to stocks and turning to cash instead — made an historic retreat (and then a return) that reflects what seems like a new normal: extreme market volatility. It’s like it’s raining bulls and bears.
The market madness included eye-popping declines on Friday and Monday when the Dow Jones Industrial Average was shredded by a total of 1,119 points. As confusion and fear gripped the market, safe havens such as gold offered no refuge. By Tuesday, Chinese officials had intervened with an interest-rate cut and investors rushed back into markets in Asia, Europe and the U.S.
For the rest of the week, the ride was bumpy for major indices. On Friday, it was a soft landing in the U.S. and Europe with Asia finishing the day with a gain.
At the bell on Friday, the Dow Jones industrial Average shed 13 points, or 0.1 percent, to 16,643 while the S&P 500 rose 0.1 percent to close at 1,988. The S&P 500 Retailing Industry Group Index dropped 0.1 percent to close at 1,201. Fashion apparel retailers closed the day with varied valuations that ranged from declines of 0.5 percent to gains of 3 percent.
In Europe, the FTSE 100 in London gained 0.9 percent to 6,247, while the CAC 40 in Paris edged up 0.4 percent to 4,675. But the DAX in Frankfurt lost 0.2 percent to 10,298, while the FTSE MIB in Milan headed down 0.9 percent to 21,993.
Earlier in the day China’s Shanghai Composite Index closed up 4.8 percent to 3,232,35 — after two weeks of extreme volatility — while Hong Kong’s Hang Seng Index finished down 1 percent to 21,612.39, with the Nikkei 225 in Japan up 3 percent to 19,136.32.
What became clear over the past week was that upward swings and steep declines are here to stay. And China isn’t the only item on the menu. A stall in the growth of emerging markets, the strong possibility of a U.S. interest-rate hike in September, a lack of a strong rebound in consumer spending (typified by a lackluster back-to-school shopping season), the often-negative impact of a strong dollar, a soften- ing in the tourism side of business, a disappearing middle class and stagnant wage growth are all influencing investment sentiment — especially in the consumer sector, which is already considered a volatile market.
As a result, the WWD Global Stock Tracker is down 11 percent over the past three months with 86 of the 100 issues in the composite declining, while 14 have advanced.
There’s also other market influencers at play. Consider the Greek financial crisis, which is ongo- ing, and an early U.S. election cycle that features a cast of seemingly unstable characters. Crude oil is also ridiculously low, which is great for consumer spending and textile firms using synthetics but bad for the energy sector. That segment of the economy has created a number of higher-paying jobs across the U.S. over the past five years, and features households that like to spend money on things like expensive handbags, jewelry, high-end watches and electronics.
All of which is creating a sense of instability magnified by dire headlines and gloomy social media posts. The result, experts say, could have a negative impact on consumer spending as the industry heads into the all-important holiday shopping season. And that, in turn, could push down fashion apparel and retail stocks even more.
In his weekly retail sales report, Michael P. Niemira, chief economist of The Retail Economist LLC, said, “The recent stock market’s weakness, volatility and uncertainty bears watching as it potentially could negatively affect consumer demand of high-income consumers, in particular, but all consumers as well.”
Scott Tuhy, vice president and senior credit officer at Moody’s Investors Service Inc., agreed, and noted that the impact on shoppers really depends upon their income level. “The concern right now is really what’s ahead for the high-end shopper,” Tuhy said, adding that households who might be seeing their stock portfolios erode by 5 or 6 percent could get nervous and pull back.
With the aspirational shopper, limited spend- ing may result, he said. With the middle class, a robust stock market didn’t mean much for households trying to stabilize their budgets, so a market drop or ongoing volatility is unlikely to impact spending. “The high end can spend from the portfolio, but that could change if they get nervous,” Tuhy said.
Lawrence White, professor of economics at New York University, said if consumers may feel less wealthy, they are “less prepared to spend.” Other economists and analysts have said the short-term negative impact on consumer spending caused by unpredictability in the stock market has a lot to do with “the headline effect.” IHS Global Insight economists said a month ago that news about the Greek economic crisis as well as the initial stock market meltdown in China had spooked consumers abroad, and will weaken spending.
The headline effect is slowly changing con- sumer behavior. Will the market bounce back? Most likely. But from a human behavior perspective, once someone is traumatized — even by secondary sources such as news reports — it’s hard to reverse the psychological impact. Which is what already occurred following the Great Recession. The downturn triggered a seemingly permanent shift in how and where shoppers spend their money. Overall, consumers are more thrifty and value-driven — even as money flows back into their pockets. And they have traded experiences for things to add a more meaningful dimension to their lives.
Recently, though, analysts noted a shift back to buying apparel, which had suffered steep declines over the past decade. Fashion trends such as boho styling, loud prints and high-waisted bottoms as well as more loose and flowing silhouettes resonated well with shoppers in recent months. And denim made a comeback at the same time. Retail- ers such as Nordstrom, Target and Stein Mart were reporting upticks in apparel sales.
Consumer confidence was also on the upswing, with the latest reading showing a significant gain in sentiment, although the survey was done prior to the most recent stock market decline.
So whether a return to apparel and accessories purchases is jeopardized is unclear at this point. Nothing is a given under these current condi- tions. In the short term, the mood is troubling. Economist Mike Norman told WWD that market volatility is likely triggering 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.”
Other economists and analysts said it was important to read into other economic data such as the employment situation and the jobs outlook. Still, the fall season is generally a time when sellers emerge in greater numbers, so more market plunges may occur. And then there’s the Federal Reserve’s meeting on Sept. 16 and 17.
Higher interest rates mean businesses have to spend more while consumers would also face higher credit card rates and bank fees, which may curb their spending. Raising interest rates could also boost an already strong dollar, which has benefited some companies while dragging down the sales and earnings of others.
Economists are split on whether there will be a rate hike when the Federal Open Markets Committee meets. Economic fundamentals are strong, they note. There’s been a recovering labor market with increases in disposable income. But the other side of the camp said real wages remain stagnant, and inflation is low. And inventories are slowly swelling, especially at retail.
In its most recent statement, the FOMC said the economy has expanded moderately. The housing market, while not robust, is on steady ground. Household spending has been also expanding, but at a moderate rate. “The labor market continued to improve, with solid job gains and declining unemployment,” the FOMC said, adding that inflation continued to “run below the committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports.”
The committee said various market-based measures of inflation compensation are low while surveys on the long-term outlook on inflation are stable. The committee said it will take a “balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent” in deciding on the rate hike. For retail and fashion apparel companies, the Fed’s apparent fence-sitting will mean ongoing volatility to their stocks.
For now, it may pay to be patient. Jack Klein- henz, chief economist at the National Retail Federation, called for calmness.
“We’ve seen these things happen before, like in August 2011,” Kleinhenz 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.”