Retail stocks hit a multi-month low last week despite strong consumer spending, which has been fueled by low unemployment rates and a stronger economy.
Falling margins and rising wages are fueling the trend and pushing the group into an intermediate correction. The trend is likely to continue well into 2019.
At the start of the new year, China tariffs will increase from 10% to 25%. The Trump administration may also expand surcharges into all Chinese imports.
The affected goods comprise a large percentage of items sold at retailers like Walmart and will force companies to either raise their prices or lower their margins. The move could affect a wide range of goods, from electronics to men’s scrub sets, housewares and toys. Because higher pricing is not an option for low-cost retailers, lower earnings per share is expected in the coming quarters.
Concerns have also been amplified by Amazon’s announcement that it will raise employee minimum wage to $15 per hour, particularly because the job market is exceptionally tight. The retail industry employs the highest number of workers in the U.S. private sector, so there is concern that other retailers will be forced to match Amazon’s wage hike regardless of the profit impact.
The retail sector’s decline follows a new emerging trend in the stock market. U.S. stocks fell more than 2% on Thursday, marking the second day of steep declines driven by concerns over rising interest rates.
The Dow Jones Industrial Average shed 546 points after plunging 831 points on Wednesday. Over the two days, the Dow lost 5.3%, its biggest decline since February. The S&P 500 also fell more than 5% in that same time period and had been on the decline for six straight days.
The selloff was widespread, affecting energy companies, health care stocks, technology and retailers. Even market favorites, like Apple, Amazon and Alphabet, continued their decline.
Government bonds and gold rose, as investors sought safe havens.
The primary concern right now is the ongoing and unresolved trade dispute between the United States and China. Companies have warned that their third-quarter results may not meet expectations. If earnings reports are strong, it may ease investor nerves.
But one U.S. business group says Trump’s tariffs are costing both businesses and consumers $1.4 billion per month. The group says that in Michigan, tariff costs tripled in August compared to the previous year. In Illionois, Texas and West Virginia, tariff costs doubled.
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