Hopes for a seamless economic recovery might have been a mite optimistic.
That was the verdict of the world’s securities markets Thursday as investors on both sides of the Atlantic — troubled by an unexpected increase in U.S. jobless claims, lingering doubts about the European Union’s bailout of Greece and even the uncertain outlook for retailing among stores reporting quarterly results — sold with a zeal approaching abandon. By the time U.S. markets closed, retail stocks were down 3.2 percent, the S&P 500 had sunk below 1,100 and the Dow Jones Industrial Average, above 11,000 at the start of the month, had fallen to within 68 points of the 10,000 mark.
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The S&P Retail Index’s descent — down 14.18 points to 427.81 — still left it up 4.1 percent for the year and 10.6 percent above its 2010 low of 386.68, but 14.4 percent below the 2010 high of 499.91, reached less than a month ago, on April 26. Since peaking, the sector has declined more than twice as often as it rose despite a slate of quarterly earnings showing mostly strong profit rebounds after the downturn.
The broader markets got hit even harder for the day, with the S&P 500 dropping 3.9 percent to 1,071.59 and the Dow Jones Industrial Average giving up 3.6 percent to end at 10,068.01.
While Americans fretted about jobs and worried about retail sales, Europeans questioned not only the fate of Greece’s debt but the future of the euro itself, sending the currency to new four-year lows before staging a mild rally. While less volatile than in the U.S., European markets also felt the selling pressure. The CAC 40 fell 2.3 percent to 3,432.52 in Paris, the FTSE 100 dropped 1.7 percent to 5,073.13 in London and the DAX Composite Index was off 2 percent to 5,867.88 in Frankfurt.
While U.S. markets seesawed, with the S&P Retail Index trimming its decline to less than 1 percent at one point, they spent the bulk of the day in negative territory. By comparison, Asian markets were placid. The Nikkei 225 declined 1.5 percent to 10,030.31 in Tokyo as the Hang Seng Index dipped 0.2 percent to 19,545.83 in Hong Kong.
The reaction from retail experts in the U.S. ranged from confidence in the progress of the rebound to minor concerns that Europe’s troubles will affect the American buying psyche to something approaching downright gloom.
“The market was much more enthusiastic than it should have been earlier on,” said Margaret Gilliam, president of retail advisory firm Gilliam & Co. “The economic recovery is not that sure a thing. We’ve still got major problems with deficits, with trade imbalances. Whatever happens, eventually we’re going to have a day of reckoning, which is going to mean much slower growth.”
People watching the employment market for signs of a strengthening were disappointed Thursday. The number of first-time jobless claims rose 25,000 last week to a seasonally adjusted 471,000, according to the Labor Department. Economists were looking for claims to fall to 440,000.
“The growth in this quarter is fragile and cautionary,” said Matthew Katz, managing director and retail practice leader for AlixPartners.
Still, he said it’s time to charge forward, but carefully. “It doesn’t necessarily mean you have to have the next big idea,” Katz said. “It doesn’t mean you have to have a new category and a new consumer and a new geography. It means you have to be more efficient.”
That translates into turning inventory more quickly and other adjustments that generally help retailers do more with less.
But consumers are just starting to come out of their hiding places and there is a danger of them being scared away again by the still-unknown economic impacts of the Gulf of Mexico oil spill, Europe’s financial troubles and even the recent rebound in the price of gasoline.
“They get spooked when the stock market goes down by 300 points and there’s an oil spill,” said Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University. “If you continually get bad news, then the consumer finally gets a little freaked.”
And it’s still not clear when Europe will get its economic act together. Greece’s budget woes have laid bare some problems in the EU. By virtue of a shared currency, stalwarts such as Germany are responsible for the debts of their neighbors, and cultural barriers keep people and companies from gravitating to stronger regions.
“There’s this kind of rigidity in this system that basically doesn’t allow these economies to adjust,” said Ghadar. “They’ve got to come up with a mechanism to resolve this and it will be slow and painful.”
Investors are unsure how Europe is going to deal with these and other structural issues, pressuring the euro before it bounced back to $1.2464.
If consumers start to pull back and begin to put more money into savings, as they did during the 2008 financial crisis, retailers would feel the pinch. The savings rate fell to about 3 percent in the first quarter, from over 5 percent last summer, indicating consumers were loosening their purse strings once again.
“It’s a question of this fear factor triggering an increase in the savings rate,” said Craig Johnson, president of Customer Growth Partners. “That is the single biggest issue.”
But Johnson said he expected growth to continue and said the generally tepid outlooks from retailers were “unduly cautious.”
“It’s like a game with the Street,” he said. “There’s an expectations game and, unless people beat expectations by at least a couple of pennies [a share], then the stock gets beat down.”
At least earlier this month, consumers were feeling better about the economy, according to a survey on consumer retail spending commissioned by Deloitte.
Of the 1,052 consumers surveyed online between May 1 and May 3, 55 percent thought the economy has started to recover from the recession and 64 percent said their household financial situation is the same or better than a year ago.
However, consumers have several serious concerns, with 54 percent saying rising energy prices could deter their spending; 45 percent citing higher taxes as a possible deterrent, and 41 percent pointing to the weak job market as possibly causing them to hold back purchasing.
Quarterly results from broadlines and specialty retailers Thursday did little to dispel concerns.
For example, at Sears Holdings Corp., better comparable-store sales weren’t enough to overcome higher costs and margin pressures, and the company registered a 38.5 percent drop in first-quarter profits.
Net income attributable to the firm, led by financier and chairman Edward S. Lampert, fell to $16 million, or 14 cents a diluted share, from $26 million, or 21 cents, a year earlier. Adjusted earnings of 16 cents a share came in 2 cents ahead of Wall Street projections.
Revenues for the three months ended May 1 slipped 0.1 percent to $10.05 billion from $10.06 billion. U.S. comparable-store sales rose 1.2 percent at the Sears division — its first quarterly rise in several years. The Kmart unit comped up for the third-straight quarter, rising 1.7 percent with strength in apparel, home goods and toys.
“Our Kmart format performed very well during the quarter, achieving margin rate improvement on top of its increase in sales and nearly doubling its adjusted [earnings before interest, taxes, depreciation and amortization],” said W. Bruce Johnson, the firm’s interim chief executive officer and president.
Sears’ shares contracted 10.9 percent to $88.70 and continued their decline in after-hours trading.