Dismal Retail Figures Body-Check Rallying Investors

Tape outside of a pet-goods store in San Diego shows a few of the steps taken by businesses to respect social-distancing measures while remaining open for customers. (Courthouse News photo/Barbara Leonard)

MANHATTAN (CN) — Investors backed away from Thursday’s rally with moderate losses Friday morning as historically horrible retail sales point to further store bankruptcies.

The Commerce Department reported that retail sales fell more than 16% last month, larger than most economists had predicted. Combined with the 8% drop in retail sales from March — when stores were still open for the first half of the month — retail has suffered the largest two-month drop in sales since the survey began in 1953.

Wall Street is banking on April being the trough for retail sales, hoping that, as states reopen and stores welcome customers back, sales will creep back up.

The Dow Jones Industrial Average, which had dug itself out of a hole to end Thursday up 377 points, opened to a 175-point drop after the morning bell on Friday, a 0.7% decrease. The S&P 500 and Nasdaq had even greater decreases, of 0.8% and 1%, respectively.

Retail has already taken the brunt of the economic downturn, with luxury retailer Neiman Marcus filing for bankruptcy earlier this month, as did J. Crew. The next chip to fall is likely J.C. Penney, which is expected to file Chapter 11 bankruptcy as early as later Friday.

Back in February, the Texas-based retail company’s last earnings release reported only $25 million in income before taxes, a 60% drop from the $63 million the company made during the same period the year before. It would be another month before J.C. Penney announced it would temporarily close its stores following stay-at-home orders in several states. 

Meanwhile, investors are hoping for a nugget of good news in the form of the University of Michigan’s consumer sentiment index, which is released later Friday morning. If the index shows any uptick in views on current economic conditions, it could point to growing optimism among Americans as some states end their lockdowns.

Some say the consumer sentiment index won’t impact Wall Street much, though, as investors are focused instead on additional fiscal policy from Capitol Hill. “At this point, the U.S. economy, like a patient in the ER, only responds to adrenaline shots as it tries to stabilize,” Boris Schlossberg of BK Asset Management wrote in a Friday investor’s note. “Therefore, equities will need to see more action from D.C. before they can move meaningfully higher.”

Scrutiny is already mounting on some of the actions taken to date by lawmakers on the hill, including the Small Business Administration’s Paycheck Protection Program.

The PPP, which was intended to provide forgivable loans of up to $10 million to mom-and-pop stores and other small businesses, has come under fire for allowing larger companies that had access to other liquidity sources to tap the funds.

After some outcry, the Treasury gave publicly traded companies until May 7 to return loans without facing any scrutiny. It later extended that deadline to May 18, but many publicly traded companies with large market caps still have not returned their loans.

As of Friday morning, more than 60 publicly traded companies have returned PPP loans worth about $412 million, according to FactSquared, whose software platform combs through filings with the Securities and Exchange Commission. 

At least 350 publicly traded companies have held onto $905 million worth of PPP loans, FactSquared found. The average market cap of those companies is $45 million, according to the collected data.

Disclosure has been wanting, mostly due to the SBA’s meager resources, so the true number of PPP loans received and returned is not yet publicly known. 

A bill proposed by Senate Democrats to require the SBA to provide weekly reporting on PPP loans failed earlier this month — including the names of recipients and the loan amounts — after Republicans worried it would “slow down” the lending process.  

Senators now are working on additional legislation to give companies more flexibility on how they use the loans, as well as possibly extending the eight-week period companies have to return the loans if they did not use 75% of it on payroll. 

“There are some businesses that aren’t going to be able to spend that payroll money in a strict eight-week period after they get the cash,” said Senator Marco Rubio in a video statement on Thursday night after meeting with Treasury Secretary Steven Mnuchin.

“Ultimately, we’re going to have to pass legislative language that provides more flexibility to account for what the crisis looks like now to make sure that we don’t have a bunch of companies sitting on money for payroll that can never be spent and has to be given back,” said Rubio, a Florida Republican.

Nearly 4.4 million people worldwide have been confirmed infected by Covid-19, according to data from researchers at Johns Hopkins University, and 302,000 have died. In the United States, more than 1.4 million people have contracted the novel coronavirus and nearly 86,000 have died.

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