Start Looking for Half-Full Glasses as Market Drops
Is a plunge in retail stocks this week a warning of a severe market setback ahead?
The retailers aren’t necessarily considered a bellwether of market direction. But because Wall Street is so terribly confused about the economy--are we in a recovery, or aren’t we?--retailers’ monthly sales figures have become an important gauge of business activity.
This week, some investors panicked at rumors that October retail sales are shaping up to be a disaster. Since by now everyone over age 7 has read that consumer spending is two-thirds of gross national product, a significant deterioration in retail sales could mean we’re back in recession, assuming that we ever exited in the first place.
The retail rumors were sparked Tuesday by a dismal third-quarter earnings projection from Ann Taylor Stores, and by analysts’ downgrading of Toys R Us on concerns about stiff price competition in the Christmas selling season.
Ann Taylor’s stock, $23 at the start of the month, has plummeted to $16.875; Toys R Us has slid from $34 to $28.75.
Meanwhile, the Dow Jones industrial average has tumbled from its record high of 3,077.15 last Friday to 3,016.32 at Thursday’s close. That’s only a 2% drop, but it masks a disturbing breakdown in some of the market’s recent high-fliers--from Philip Morris (at $69.50 now, down 7% from its 1991 high) to biotech stocks, some which have collapsed almost overnight. Repligen, for example, has fallen from $30.25 to $18.875 this week.
What gives? On the retail front, many analysts say rumors about sales collapsing across the board probably are false. Consumer spending isn’t getting worse, they say--it just isn’t getting better. Some retailers, such as Ann Taylor and Nordstrom, had been far too optimistic about fall sales, says independent retail analyst Walter Loeb in New York. But he believes that most retailers have been preparing for lousy sales by keeping inventories tight and costs down.
Loeb says that he talked with Wal-Mart President David Glass this week and that there was no sign from Glass that October is worse than expected. “I think they’re still going to show high single-digit growth,” referring to same-store, year-over-year percentage sales gains.
Stephen Roach, economist at Morgan Stanley & Co. in New York, believes that talk of consumers pushing the economy back into recession is far too pessimistic. What consumers will do, however, is keep their spending subdued for a long time to come, as they take a sober view of job security and income growth potential in the 1990s, Roach says. He recently reduced his forecast of real consumption growth for the economy to 1.5% for the six months ending next March 31. He had previously forecast 3% growth.
Even if Roach is right about that minuscule 1.5% growth in consumption, some retailers will clearly do much better than that. The retail battle in the 1990s is going to be a fight for the limited discretionary income of fearful, debt-burdened consumers. That’s a battle that only the deep-discounters and other “value” retailers can win, says Kurt Barnard, publisher of Retail Marketing Report newsletter in New York.
“Thriftiness is going to be with us for a long time,” he warns.
To put it another way, if high-brow jewelry retailer Tiffany & Co. represented the consumption-crazy, pay-any-price decade of the ‘80s, the symbol of the ‘90s is more likely Value Merchants, a Milwaukee-based firm that does a booming business selling toys at prices below wholesale. So far this year, their stocks seem to accurately reflect consumers’ changed mind-set.
And what about the stock market overall? Well, if retail sales indeed just putter along, then the economy is likely to continue its agonizingly slow recovery. Sentiment should be helped by improving news from the manufacturing sector (durable goods orders for September, released Thursday, looked OK if you take out volatile defense orders). If investors can at least continue to believe in some semblance of economic growth in 1992, the bull market isn’t dead.
Still, the breakdown of key stock groups in recent weeks could portend a sharp selloff into November, says Ken Spence, technical analyst at Salomon Bros. in New York. “A majority of blue-chip stocks are starting to roll over,” he says. Considering the paper gains that many investors have amassed in stocks this year, Spence believes that there is every reason to expect that there is much more profit taking to come. He believes that the Dow could fall to as low as 2,800 in November--a 9% drop from the 3,077 peak. That will be painful for many investors.
But don’t lose sight of what’s on the horizon: Most likely another drop in interest rates by the Federal Reserve and almost certainly some kind of federal tax cut for the middle-class in 1992 (it’s an election year, remember!). That talk should put a floor under stock prices later in the year and set the stage for a rally early in 1992.
So if your favorite stocks get hammered over the next few weeks, it could be much smarter to view the decline as an opportunity to buy rather than a reason to bet on a new bear market.
Tale of Two Retailers The trends in two stocks this year may foretell the story of retailing in the 1990s: Tiffany, the retail symbol of the upscale ‘80s, has plunged. Meanwhile, deep-discount toy retailer Value Merchants has been one of the year’s hottest stocks. Tiffany trades on NYSE; Value Merchants on NASDAQ
