Stocks Take a Beating
Weak Jobs and Retail Reports Set Markets on Day's Big Slide

By Heather Landy and Ylan Q. Mui
Washington Post Staff Writers
Friday, September 5, 2008

Stocks tumbled yesterday, recording one of their worst declines of the year in a session that started weak and grew increasingly worse as the day wore on.

The Dow Jones industrial average and the Standard & Poor's 500 index declined 2.99 percent each. Traders and portfolio managers said a drop in crude oil prices appeared to drive stocks lower in midmorning trading, but they could not point to a specific explanation for why the market continued a steady march lower to the session's close.

The blue-chip Dow index, which opened at 11,532.48, had sunk below 11,300 by lunchtime and finished at 11,188.23 for its biggest one-day decline since June 26. The S&P fell 38.15 to 1236.83.

"It's sort of a head-scratcher because I don't think there was anything that material to take [the market] down that much," said Chris Hensen, senior portfolio manager for U.S. equities at MFC Global Investment Management in Toronto.

New data on jobs and retail sales helped get stocks off to a shaky start. The Labor Department reported in the morning that the number of Americans filing new unemployment claims rose to a higher-than-expected 444,000 in the last week of August. A key measurement of retail sales, meanwhile, grew at an anemic 2 percent and indicated that shoppers are clinging to stores like Wal-Mart and Costco, where they can find basic goods at discount prices.

All the major department stores reported lower sales compared with last August at stores open at least a year. Comparable-store sales also plummeted at teen-oriented stores like Abercrombie & Fitch and Wet Seal, in what is normally the height of back-to-school season.

Speaking at a Goldman Sachs retail conference, Lowe's chief executive Robert Niblock said that 90 percent of its stores are in markets with declining home prices and that values are expected to continue to fall. Shares of the home-improvement retailer fell 3.5 percent yesterday to close at $25.77.

Through the summer, it has been hard to determine how American consumers are faring because their behavior may have been distorted by the burden of high gasoline prices and by the impact of $107 billion in federal stimulus checks that went out starting in April. With no more checks on the horizon and gas prices drifting downward in recent weeks, the August sales results offer a glimpse of the underlying weakness in Americans' buying power as home prices plummet, the job market falters and lending tightens.

"There's still a lot of economic turmoil that households are working through," said Frank Badillo, senior economist at TNS Retail Forward, a market research firm.

There had been hope that falling gas prices would mitigate the end of stimulus check spending. Prices peaked in July at $4.11 a gallon and have been steadily declining since, down 10 percent to an average of $3.68 this week. But as yesterday's retail sales data show, consumers are still facing deep strains.

Employers have cut jobs each month this year, a record economists expect to have continued in August. (That report is to be released this morning.)

With the weak job market, workers have less leverage to negotiate raises. In the year ended in July, nonmanagerial workers' average pay rose 1.6 percent, far below inflation.

Nor do Americans have as much flexibility to borrow as they did in recent years. Stung by losses on loans made in the boom years, banks and other lenders have become more cautious. For example, 80 percent of senior bank loan officers surveyed in July by the Federal Reserve said they had tightened lending standards for home equity lines of credit, a form of borrowing that helped boost sales in recent years. And the average interest rate on a 30-year, fixed-rate mortgage, which was under 6 percent in May, was 6.35 percent last week, according to Freddie Mac.

Concerns about the ongoing credit crunch have pummeled financial stocks this year. Banks and brokerages, hurt by mortgage defaults and their impact on the value of securities tied to mortgage loans, were among the biggest decliners Thursday. Citigroup fell $1.31 to $18.30, Bank of America dropped $2.36 to $30.60, and Lehman Brothers declined $1.66 to $15.28.

"If you look at what's going on in the credit markets, there's really not much improvement there, just more of the same. Maybe things get worse this quarter," Hensen of MFC said. "I would be sort of shy on them going into earnings season. I think it's going to be pretty tough on them."

Baltimore-based money manager Legg Mason tumbled $4.76 to $42.61 after Credit Suisse downgraded the stock on concerns about the possibility of additional write-downs and withdrawals. American Express fell $2.16 to $38.75 after a Lehman Brothers analyst cut his 2009 profit forecast for the credit card company.

Industrial issues including Caterpillar and General Motors also declined. Boeing, working to avert a strike by its machinists, fell $3.04 to $63.03. AK Steel fell $5.05 to $40.48 after Goldman Sachs downgraded its outlook on the steel industry.

Data released by nearly 40 retailers yesterday showed that shoppers flocked to discount stores and warehouse clubs in August, a sign that consumers' budgets remain constrained.

Sales at Wal-Mart's U.S. stores open at least a year were up 3 percent excluding fuel, once again besting rival Target, where sales fell 2.1 percent. Wal-Mart's discount division Sam's Club rose 4.2 percent, while Costco grew a strong 6 percent and BJ's Wholesale Club jumped 7.7 percent, all excluding fuel.

Specialty retailers and department stores posted dismal results, with some sacrificing sales in favor of leaner inventories and others promoting aggressively to drive up traffic. Even luxury retailers, whose customers were thought to be immune to the downturn, experienced declines, including a 0.5 percent dip at Neiman Marcus Group and a 6 percent drop at Saks.

The back-to-school season is often viewed as a bellwether for the holidays, a make-or-break time for retailers. If August is any indication, consumers are not likely to feel very festive.

"From a 30,000-foot level," Todd Slater, an analyst with Lazard Capital Markets, wrote in a research note, "the best that can be said was that the month came in less bad than had been feared."

Staff writer Neil Irwin contributed to this report.