There was a huge and sudden decline in retail stocks on Thursday, which swept through the sector beginning around 1:20 p.m. Eastern time. A number of retail stocks quickly sold off between 10 percent and 15 percent. There didn't appear to be any news related to any individual company that set off the decline.
What Triggered the Retail Stock Collapse?
The culprit? President Donald Trump decided to extend tariffs to the remaining $300 billion of imported Chinese goods that haven't already been taxed.
Our representatives have just returned from China where they had constructive talks having to do with a future Trade Deal. We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing. More recently, China agreed to...
— Donald J. Trump (@realDonaldTrump) August 1, 2019
And it wasn’t just retail stocks that got hit. The entire stock market did. Yet the market recovered while retail stocks showed only modest improvement.
What triggered this tariff move, and what is the near-term and longer-term future for these retail stocks?
Donald Trump increased tariffs in what appeared to be part of his broader strategic approach with Chinese trade. The last thing the stock market had heard regarding the trade war was a few weeks ago when Chinese President Xi agreed to buy more American agricultural products and crack-down on the flow of fentanyl into the country.
Donald Trump said that China had not followed through on either promise.
As it is, China is a difficult opponent when it comes to many issues. This is compounded by the fact that its government is entirely opaque, and there are numerous internal crosscurrents that affect Chinese policy that the U.S. will never understand or even know about.
Retail and Department Store Stocks Crushed
As for the retail stocks, companies like Dillards, Children's Place, The Gap, Ralph Lauren, Abercrombie & Fitch, and many other clothiers whose goods are produced in China saw their stocks whacked.
Numerous department stores were hit as well, including Macy’s, Nordstrom, and Kohl’s.
Most were down by 10 percent or more at the close.
As far as the near-term goes, this may create a solid buying opportunity in many of these names. For those who have been watching carefully since the trade war began, the stock market as a whole and individual stocks tend to react very sharply when there is news of any kind, positive or negative.
In fact, a few weeks ago when news broke regarding China's supposed agreement regarding agricultural products and fentanyl, the market shot up.
But Now Those Stocks Are Cheap
The trade war generates tremendous investor emotion, which translates into volatility. Yet in paying attention to movements of the stock market and individual stocks when these news items break, prices tend to reverse after the initial panic or euphoria. Today it was panic.
That's because rationality returns to the market. Pundits appear in the media reminding everyone that this is a long-term trade war. Cooler heads prevail, and stocks come back to their senses.
Thus, jumping into these retail names now and setting a stop loss of five percent to seven percent could yield a quick profit.
This must be kept in context with the long-term retail outlook. As we know, Amazon is conquering the world. Certain retailers are doing better than others. The longer-term outlook for clothing retailers and department stores is going to very much be dependent on how an individual company response to the threat from Amazon.
Disclaimer: This article is intended for informational purposes only and should not be taken as investment advice.