The Retail Fallout By: Gabriel PotterMBA, AIFA® 2017.05.16

We’ve been spending more time than usual focusing on the retail sector, both in previous blog posts (e.g. our Brick and Mortar story last November) and our latest set of monthly articles (The New Retail – Part 1).  If you have direct investments in retail companies, you certainly care.  If you consider retail and consumer spending, a full 70% of the economy, a harbinger of economic health, then you should care.  But what if you are primarily a bond investor –protected from cyclical changes to US economic health and you don’t directly own any of these retail company securities – neither stocks nor bonds.  Why should an ostensibly insulated investor care?

In a word, bankruptcy.  Fitch Ratings reports the overall US retail loan default rate is already up to 1.7% and may get pushed to 2.7%.  Further, the leveraged loan default rate, a higher risk pool, may jump to 9% in 2017.  When these retailers go under, the debts they owe may go partially or fully unpaid.  Lenders are going to take a direct hit to their assets, shrinking the pool of available credit for other companies of every type and, at worst, potentially damaging the solvency of those lenders.  This sort of pattern should seem familiar to anyone who went through the 2008 financial crisis, when bad loans were concentrated in home equity crippled financial institutions.  For clarity, the implications of a slowing retail environment are likely to be materially less destructive than the 2008 financial crisis.  We don’t want to exaggerate and overstate the problem. This slowdown has been a long standing trend; we will even discuss how the industry has been compensating in our next monthly article. However, recognizing the problem and adopting proportionate caution is wise.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

More about Gabriel Potter
Sign up for our Newsletter
Sign up for our Newsletter