Wall Street Dealt a Blow by Dismal Retail Results

Dismal retail results and rising foreclosure numbers dealt Wall Street a blow on Wednesday, with the Dow Jones Industrial Average ending the day down 2.18 percent, the Standard & Poor’s 500 losing 2.69 percent and the Nasdaq Composite dropping 3.01 percent. The next two days will determine whether the markets will recover sufficiently to end the week on a positive note. Having rallied since hitting an early March low, Wall Street traders were optimistic that the rally would be extended into this week. This optimism was based on a string of economic reports that exceeded expectations, as well as indications that some of the nation’s largest banks may be turning around and have weathered the financial crisis storm.

The retail sales report released by the government on Wednesday morning revealed that April’s retail sales dropped by 0.4 percent. With investors having expected better results than that, it has fueled debate between bears and bulls as to whether stocks had gained too much too quickly in recent weeks and where the economy is heading. The general consensus though, is that it would be unrealistic to expect a sustained market rally in the current economic climate where the recession has impacted on every sector of the market. Nevertheless, the fact that the rate of decline is slowing is seen by many as an indication that rescue measures are having a positive effect.

Big-ticket purchases, such as electronics and appliances, were the hardest hit with a drop of 2.8 percent in April sales. This was closely followed by a 2.3 percent decline for gasoline stations, with food and beverage stores dropping 1.1 percent. This is seen as an indication that, despite the increase in disposable income generated by tax reductions, consumers are being extra cautious about buying non-essential items. Even the concept of what are essential and non-essential items has changed for many consumers, and this is reflected in their purchases and monthly budgets as they deal with the very real possibility of job losses.

Markets indicate that investors are selling off shares of manufacturers of non-essential, or discretionary, consumer goods, as well as those of information technology, industrial companies and financial companies, the latter being affected by the results of the stress test which has sent a number of banks into capital-raising mode in order to repay TARP money. Sectors that gained included consumer staples, health care and telecommunications