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Retail Stock Rally Spurs Hope

The Baltimore Sun

Retail stocks have turned up sharply this week, and at least one stock market analyst thinks that could be a sign that the economy is poised for a rally.

Otto Grote, a veteran retail analyst with Derby Securities in New York, said strong gains Wednesday and Tuesday among the nation's retailers broke a six-month downtrend in the retail sector.

His firm's Derby General Index of 56 retail stocks, which fell to 1441.63 at the end of August, from 1620.65 at the end of February, rose more than 25 points in the past two days. Grote said the index bottomed out in June, rose in July and "waffled" in August before its "breakout" this week.

The vast majority of retail stocks showed increases in the past two days, many of them dramatic.

Federated Department Stores stock, for instance, has risen 7.41 percent since Monday, and Woolworth is up 5.79 percent. Merry-Go-Round, The Gap, Staples, Claire's Stores and CompUSA have all increased more than 5 percent.

Grote said the performance of retail stocks "is the best leading indicator there is." This rally, he said, suggests that consumer spending will take off later this fall, probably about November.

He said the rally reminded him of what happened on Aug. 13, 1982, when the economy was in the depths of a major recession and he was thinking of giving up on retail stocks. "The retail stocks went absolutely bananas at a time when there was no hope," he recalled.

A few months later, the economy emerged from recession and staged the longest recovery in recent history.

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That August 1982 rally, he said, proved to be the beginning of a five-year upturn in retail stocks that lasted until the stock market crash of October 1987.

Not everyone was buying Grote's premise. Kurt Barnard, president of Barnard's Retail Consulting Group and publisher of a respected newsletter on retailing, said it would be "definitely wrong" to conclude that the economy was improving because retail stocks are going up.

"It's not based on improved sales," he said. Rather, he said, investors are attracted by the prospect of improved earnings based on cost savings.

"Cost savings always spell reduction in payroll," Barnard said.