The Dow's Huge Gain Leaves Retail Behind as Wal-Mart Falls, Home Depot Lags

The Dow Jones Industrials is having a good day, rising 121 points as of 12:30 p.m. EDT. In the absence of any market-moving economic or geopolitical news, investors appear content to wait and see whether the Federal Reserve's comments in the minutes from its latest monetary policy meeting are consistent with what they've already inferred from the Fed's pronouncements. Most investors believe the central bank will stay on its current course to eliminate quantitative easing by the end of the year, but that short-term interest rates will stay low well into the future. Even though that's generally positive for stocks, it isn't helping the retail stocks in the Dow Jones Industrials, as Wal-Mart is down about half a percent while Home Depot is just under  the unchanged level.

Source: Wal-Mart.

The retail sector took another hit today, as Wal-Mart's largest big-box retail rival fared poorly due in large part to fallout from a massive card breach that exposed millions of customers' confidential information to potential identity theft and financial fraud. Wal-Mart's own earnings report last week pointed to similar weakness; the specific problem Wal-Mart faces is that the economic recovery in the U.S. hasn't given its core low-income and lower-middle-income customer base the same improvement in financial conditions that luxury retailers have seen from their upscale clientele. Food stamps and other government programs continue to see funding pressures, and that in turn leaves Wal-Mart customers with less disposable income to spend. The same profit-boosting forces that have helped propel the Dow Jones Industrials higher have led to limited gains in wage income for Wal-Mart customers, and with few signs of that trend changing, the retailer will have to expand its target audience in order to promote growth.

Home Depot's retail niche is far different from that of Wal-Mart and its general-purpose peers, given Home Depot's specific exposure to the housing market. Home Depot's quarterly results painted a mixed picture, although they were good enough to send the stock higher after their release yesterday. Earnings per share jumped by more than 15% from year-ago levels, but a same-store sales gain of 2.6% worldwide fell short of what investors had hoped to see. Home Depot expects the remainder of the year to go well, with housing strength supporting traffic both from housing-industry contractors and from do-it-yourself homeowners. But after a solid jump in share price yesterday, investors appear reluctant to bid up Home Depot stock any further until they get confirmation that the housing market will weather any future sluggishness.

The Dow Jones Industrials don't need retail stocks to do well in order for the overall average to climb. But given the role consumers play in the economy, signs of weakness from Wal-Mart or Home Depot could be symptomatic of larger problems that could eventually send the Dow to its long-awaited correction -- or worse.

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