U.S. Stocks Bounce Back, Retail Segment Rises

After a severe dip on global economic woes Tuesday, stocks bounced back out of the correction zone Wednesday as a seemingly more sober investment community set China concerns to the back burner, jumped on cheap tech stocks and viewed earnings growth in the financial sector as a big plus for the market.

Regarding an interest-rate hike, clarity on the timing of an increase still remains unclear, but some economists noted that a hike might be a good first step toward normalization of interest rates.

As a result, the Dow Jones Industrial Average closed the day up 293 points, or 1.8 percent, to 16,351 while the S&P 500 also finished with a 1.8 percent gain to 1,948. The S&P 500 Retailing Industry Group Index rose 2.2 percent to 1,182.

Some notable gainers included Vera Bradley Inc. with a 27.4 percent gain to $13.28. The company reported better-than-expected earnings earlier in the day. Michael Kors Holdings Ltd. finished up 4 percent to $44.51 while Quiksilver Inc. gained 7.9 percent to close at 45 cents. Destination XL Group Inc. rose 6.5 percent to $6.44, and Christopher & Banks Corp. rose 5.6 percent to $1.70. Many of the retail gainers had recovered losses from Tuesday’s broader market decline.

In a report from the Federal Deposit Insurance Corp., U.S. banks saw earnings rise 7.2 percent to $43 billion in the second quarter from $40.1 billion in the same period last year. They also noted the volume of bad-debt write-offs declined. Still, the FDIC said margins remain tight due to record-low interest rates.

Wall Street loathes a rate hike, but economists and analysts are increasingly noting that a small uptick this year, and another next year might be the right move toward creating longer-term stability. The Federal Reserve is eyeing inflation, wage growth, employment and consumer spending to determine when and how much to raise rates. But it’s a complex assessment.

“I think the Fed is itching to start the process of normalization,” said Andrew Nelson, chief U.S. economist at Colliers International. “But inflation is difficult to measure. The bundle of goods used to gauge inflation changes, and we see certain segments such as apparel and electronics declining while other sectors of the economy are [experiencing inflationary price trends].”

There are also geographical differences to consider in assessing the need for a rate hike. In its Beige Book report released Wednesday, the Federal Reserve said economic activity “continued expanding across most regions and sectors during the reporting period,” which was from July through mid-August. However, the Fed said its districts in New York, Philadelphia, Atlanta, Kansas City and Dallas all reported more moderate activity. The Fed said employment conditions created pressures on wages, which would weigh on the side for an interest rate hike.

Cheap fuel and a strong dollar are having a negative impact, the Fed said, adding that a slowdown in China has reduced the demand for certain U.S. products — including wool.

On the consumer spending front, the Fed said a majority of the districts experienced expansion in sales. Some were flat such as Cleveland, and Atlanta was mixed. Dallas experienced a year-over-year decline. And tourism-related spending continued to be strong, as were auto sales. But the gains were not across the board.

“Tourism activity in the New York District remained generally soft,” the Fed reported. “Hotel occupancy rates and room rates were flat in New York City, but picked up in other parts of New York State. Restaurant sales were up in the Philadelphia, Cleveland and Kansas City Districts.” The report confirmed what retailers who rely on tourism dollars have been saying for the past month: a strong dollar is hurting tourism, which negatively impacts sales.

Regarding recent stock market volatility, Nelson said there is a risk of a global economic slowdown, but reiterated that the economic weakness in China was perhaps long overdue. He said a 10 percent gross domestic product growth rate there was not sustainable. And it was a market fueled by government spending. “Now, they’re trying to make the economy more consumer driven,” Nelson explained. “So there’s been some growing pains.”

Unlike the U.S., which has two-thirds of its economy fueled by consumer spending on goods and services, China’s consumer spending drives about 50 percent of the economy. Asked about the impact of a devalued yuan, Nelson said U.S. apparel retailers will likely see lower prices, which creates an opportunity to either fatten up their margins or pass it along to the consumer via lower price points.