usatoday.com
08/31/2001 - Updated 11:31 PM ET
Bull market laid to waste as spending dries up
By USA TODAY reporters Adam Shell, Matt Krantz, Noelle Knox and
Christine Dugas
Jill Eastman, a librarian from Denver, planned
to buy a gas-guzzling SUV and a 32-inch TV.
Not anymore. With college bills looming for
her 19-year-old daughter and the stock
market and economy looking sickly, she's
watching every penny. "We're putting off big
purchases as long as we can," Eastman says.
"We don't know what's going to happen."
Martyn Richardson, an 80-year-old retiree
from Scarborough, Maine, is cutting back,
too. That trip to Florida he planned to take
this winter to escape Maine's subzero
temperatures? It ain't happening. "We're more
cautious than we were 2 years ago," he says.
Forget tech stocks. Folks like Eastman and Richardson who have abruptly
reeled in their spending are Wall Street's latest nightmare.
Consumer spending — or the lack of it — is the latest worry du jour.
Investors have "quickly become very concerned about the health of the
consumer," says Richard Bernstein, strategist at Merrill Lynch.
Scared stiff, more like it. Thursday, news that consumer spending in July grew
at its slowest pace in 9 months sent all three major indexes tumbling and close
to breaking through lows set in the spring.
The Dow Jones industrials plunged nearly 2% to 9920, the first close below
the key 10,000 mark since April 9. The Nasdaq composite slid almost 3% to
1792.
Even with Friday's modest gains, the major indexes are sharply down for the
week. The Dow Jones industrial average fell 4.5% for the week. The Nasdaq
composite index lost 5.8%, and the Standard & Poor's dropped 4.3%.
The fate of the economy — and the stock market — rests on consumers'
willingness to keep parting with cash to buy cars, fly to exotic locales or catch
the latest flick.
Consumer spending accounts for two-thirds of economic activity. Until now,
consumers have kept spending, despite rising layoffs and shrinking stock
portfolios. That's enabled the hobbled economy to avert recession,
economists say.
So far, the consumer has been the market's life jacket. Consider that just 11
of the 22 Standard & Poor's 1500 industry groups are up over the past 52
weeks — and seven were consumer focused.
But here's the scary part: Five of those seven formerly strong consumer
groups have crumbled in the past 7 trading days, S&P says.
And Thursday, some of the biggest decliners were companies that depend on
consumer spending to boost earnings. Starwood Hotels fell 5%. Best Buy, a
retail chain that sells PCs, dipped 4%. Apparel retailer Liz Claiborne lost 3%.
Toymaker Hasbro lost 2%. Even motorcycle maker Harley-Davidson,
despite a cultlike following, lost 2%.
The big concern is that consumers, worried about losing their jobs, will stop
spending altogether.
"With all the layoffs, you don't know whether families are going to be able to
defend their standard of living or if consumption is going to roll off the table,"
says money manager Scott Black of Delphi Management.
The easy supply of consumer credit has kept the nation spending. But the
debt load is also a potential time bomb for many families. With little or no
savings, they're often living paycheck to paycheck. The slightest glitch, an
unexpected medical bill or a cut in overtime pay, can push them over the
edge. Bankruptcy filings surged 25% in the second quarter from a year earlier
and are on track to surpass the record-breaking year of 1998. Late
credit-card payments jumped to 5.06% in July from 4.41% a year earlier,
according to Moody's Investors Service. Meanwhile, U.S. consumers owe
$678 billion on all credit cards, CardWeb.com says.
Recently, there have been growing signs that the consumer is beginning to
crack. Consumer confidence declined unexpectedly this month. Sales of
existing homes also dipped in July, suggesting that the surprisingly robust real
estate market may finally be cooling. Retail sales have been sluggish, and the
bulk of sales have gone to discount giants like Wal-Mart.
If consumers do decide to slam their wallets shut, what sectors do analysts
say will suffer most?
Retailers. This industry seems to be following the waistbands on
women's jeans — lower and lower. A recovery in the second half of
the year is "highly unlikely," says Emme Kozloff, an analyst at Sanford
C. Bernstein.
Retail sales, adjusted for inflation, fell 2.4% in July. That's the steepest
drop this year and follows 3 months of fairly flat sales.
August results will be released Thursday, but most analysts suspect the
tax rebates only helped discount stores like Wal-Mart and Target.
"This is a one-time boost," Kozloff says.
But back-to-school sales are expected to be 3% to 5% below last
year. Investors aren't waiting to see if those expectations pan out. The
worst performers the past week include Kmart and Limited.
Autos. Strong auto sales in the first half of the year had a lot of
doomsayers baffled. But now it appears manufacturers have been
driving sales with hefty rebates and cutthroat prices.
On Thursday, DaimlerChrysler said it was trimming prices on 2002
Chryslers to help sales.
"Vehicles were being rammed down people's throats," says Nick
Lobaccaro, analyst at Lehman Bros. "Now, it's payback time."
Ford CEO Jacques Nasser has said he doesn't expect any relief soon,
because the industry is burdened with too much global capacity. Ford
may increase the number of white-collar layoffs from the 5,000
announced this month.
Automakers will release August sales results starting Tuesday. Analysts
are expecting a seasonally adjusted rate of 16 million, down from 16.2
million in July.
Housing. This is the big wild card. No matter where the stock market
is, the wealth of most Americans is tied up in their homes. The real
estate market has proved surprisingly resilient. New-home sales, which
rose 2% in June, are up 9% year-to-date. Existing-home sales could
set a record this year, despite a 1% dip in July.
"Despite the bad employment news, firming consumer sentiment and
low mortgage rates are keeping housing demand at healthy levels," says
John Stanley, a housing analyst at UBS Warburg.
But not everyone is so confident. Last month, Goldman Sachs'
Christopher Winham downgraded the sector, saying, "It's tough to get
a mortgage without a job."
Employment didn't start to decline until April, which partly explains why
the housing market has remained so robust in an otherwise weakening
economy, he says. The Federal Reserve's seven interest-rate cuts have
helped make housing more affordable.
Winham points out that over the past 15 years, home builders have
posted four significant rallies similar to the current one. And in each of
those cases, the group fell an average of almost 50% in the following 6
to 14 months. The sector, he says, "could potentially be poised for a
meaningful pullback."
Leisure. Consumers have gotten such a roller-coaster ride surviving
the stock market and layoffs that they don't want to pay to ride the real
thing. Look no further than shares of Six Flags, which clearly shows
investors have a case of vertigo. The stock was up 37% this year
through mid-May, when investors were confident that vacations are
sacred to consumers. But since then, shares have been in a free fall and
are down 9% this year. Six Flags has already warned that consumers
weren't spending as much in the parks as hoped.
Cruise line stocks, which had also been rising this year, are starting to
sink as investors get worried about consumers. Carnival shares, while
still flat for the year, have dropped 8% the past month.
"Now that things are more dire, consumers are less confident and
leisure spending is being cut," says Chris Cox of Goldman Sachs.
Drugstores. Investors are bailing out as they realize firms such as
CVS and Walgreens are more exposed to a consumer spending
pullback than previously believed, says Bob Summers, analysts at Banc
of America Securities.
Historically, drugstore stocks were a haven for investors, because
consumers need to buy drugs in good economic times and bad. But
facing tougher competition, drugstores have gradually expanded into
selling non-drug items such as beach balls and lawn chairs. Such
non-drug items were twice as profitable as drugs.
But the shift has left drugstores more exposed than ever to the
consumers' cutback, Summers says. All of the major national
drugstores have since missed earnings expectations.
Banks and savings & loans. If there's been any bright spot amid the
lousy stock market, it's been the banks. The S&P bank group had
gained 12.5% the past 52 weeks. But the stocks are under pressure
now, mainly because of fear that rate cuts are largely over.
But investors are getting increasingly worried that laid-off consumers may
have a harder time paying their mortgages, says Chris Buonafede, an analyst
at Fox-Pitt Kelton. "As job losses mount, there will be pressure," he says.
Most analysts aren't predicting a banking meltdown, even if the economy
sours further. The strong housing market has reduced banks' risks, because
most houses could be sold for large gains and reduce any possible losses,
says Jack Micenko, analyst at Lehman Bros. So far, there's no sign that loan
demand is decreasing.
Investors shouldn't take too much comfort, though, because the very last thing
struggling consumers do is pay the mortgage late, Buonafede says.
With the Dow plunging below 10,000 again and no catalyst in sight to boost
stocks, the chances of the market retesting their lows are high, traders say.
"We are going back to retest those levels, and it feels like death," says Todd
Clark at WR Hambrecht. Hitting new lows could trigger the so-called
capitulation bears have been waiting for. "That might finally get people to say,
'Forget it. Sell everything. I don't want to be in the stock market ever again.' "
KJC |
