NEW YORK – The Federal Reserve Board gave retail shares a boost on Thursday, although the rest of the stock market dipped.
As the Federal Reserve held off on pulling the trigger on an interest rate hike – at least for now – retail and related stocks in the discretionary spending segment jumped on the news while other sectors slogged through a volatile session in light trading volume.
Not helping major indices was that many of the active investors had stood on the sidelines with a wait-and-see approach, analysts said. Top of mind for them is if the Fed would just wait until its October meeting to raise rates.
As a result, the Dow Jones Industrial Average lost 65 points, or 0.4 percent to 16,674 while the S&P 500 shed 0.3 percent to 1,990. However, the S&P 500 Retailing Industry Group Index gained a solid 0.5 percent to close at 1,215. The WWD Global Stock Tracker closed up 0.3 percent to 106.67.
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Most of the gains in the retail sector were between 0.2 and 3 percent. Standouts included American Eagle Outfitters Inc. with a 3.5 percent gain to $16.26, Bebe Stores Inc. rose 6.4 percent to close at $1.17, and Zumiez Inc. gained 6.5 percent to finish at $15.84.
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Earlier in the day, indices in Europe and Asia closed with varied results. Japan’s Nikkei 225 gained a hefty 1.4 percent to close at 18,432 while the Chinese Shanghai index lost 2.1 percent to finish at 3,086. In Europe, London’s FTSE 100 lost 0.7 percent to 6,187 while the French CAC 40 gained 0.2 percent to 4,655.
In its policy statement, the Federal Open Markets Committee said to support “continued progress toward maximum employment and price stability, the committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”
That leaves the possibility of a hike at the policy meeting next month.
The FOMC said it was maintaining a 2 percent inflation objective, and will continue to assess economic conditions taking into account “a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
On that last note, the World Bank pulled together a white paper and letter this week urging the Fed not to raise rates. The bank said “activity has slowed in many emerging markets in recent years, and growth in emerging markets in 2015 is expected to be the weakest since the global financial crisis.”
The decision on whether to raise interest rates has had investors – who had holdings across many sectors – nervous since the spring when the Fed said there was the possibility of a rate hike this year. Citing several metrics such as employment data, jobless claims, inflation, consumer spending and consumer confidence, among others, the Fed said an improved economy would inform a rate hike.
But that made Wall Street jittery as a rate hike would mean higher costs for companies to do business, which would eat away at profits. And consumers, too, might feel more pinched by higher credit-card rates and overall financial terms on debt.
So with every economic report released since the spring that seemed to suggest economic strength, the chance of a rate hike increased, and investors got nervous. It became a case when “good news is bad news on Wall Street.”
Investor sentiment changed, though, as the debt crisis in Greece grew more worrisome. And then weakness in the Chinese economy, which is trying to transform itself from being a government-funded economy to a consumer-driven one, began to worry global investors who fled from emerging markets and hoarded up on cash investments instead – and even reduced their exposure to U.S. equities, according to the monthly survey of fund managers from Bank of America Merrill Lynch.
What made this troublesome is that it revealed the close relationship between developed and emerging markets. Economists and policymakers suddenly realized that well-established markets need emerging markets to thrive. Ayhan Kose, director of the World Bank’s development prospects group, said “risks are compounded by recent spikes in volatility in global financial markets and deteriorating growth prospects in developing economies. An abrupt change in risk appetite for emerging market assets could become contagious and affect capital flows to many countries.”
In the press conference following the policy statement, Federal Reserve chair Janet Yellen said she thought developments that “we saw in financial markets in August in part reflected concerns that there was downside risk to Chinese economic performance and perhaps concerns about the gaps where policymakers were addressing those concerns.”
She said, in addition, the FOMC saw a “very substantial downward pressure on oil prices in commodity markets. And those developments have had a significant impact on many emerging market economies that are important producers of commodities as well as more advanced countries including Canada, which is an important trading partner of ours that’s been negatively affected by declining commodity prices, [and] declining energy prices.”
Although not specifically mentioned by the Fed, the U.S. Department of Commerce released its income and poverty report this week, which confirmed what the broader retail industry has been experiencing for some time: household income is stagnant. But that could change, according to at least one economist.
The Commerce Department said median household income adjusted for inflation was $53,657 in 2014, which is about 6.5 percent below 2007’s reading. Chris Christopher, director of U.S. macroeconomics and consumer economics at IHS Global Insight, said the reading was expected, and showed that it was not statistically different from the level in 2013.
“This is the third consecutive year that the annual change was not statistically significant,” he said. But that may change as employment conditions – including wages – improve, the economist said. And that could jack up inflation, which could trigger a rate hike. “We expect real median household income to surpass its 2007 level in 2019,” Christopher added.
In the meantime, consumers and retailers will be having a bit of a struggle.
“Many middle-class families have been forced into a lower standard of living during the recession and the subsequent anemic recovery,” Christopher said. “Indeed, the Great Recession was brutal to many middle and lower-income households. The poor performance of real median household income and elevated poverty rates have caused a bifurcation in consumer spending patterns — discount stores are doing well and luxury is doing great, while the middle-tier retailers are having a hard time gaining traction.”