Nervous Consumers Stall Recovery

The fear on Wall Street is that nervous consumers (non-believers) are going to short-circuit the economic recovery.

Stocks fell sharply this past Friday, taking the major indexes (NYSE & NASDAQ) down about 1 percent, after investors were disappointed by reports that the Reuters/University of Michigan index of consumer sentiment fell significantly short of expectations for the first part of August. That’s a sign consumers may well keep cutting back their spending as they worry about losing their jobs and furthering economic woes. Consumer spending is crucial for the economy to emerge from recession as it accounts for two-thirds of all U.S. economic activity.

The discouraging reading came a day after the Commerce Department reported a rather unexpected down trotting in retail sales, which was not suppose to happen this time of year as August has typically been a big month for retail. Investors were able to shake that off, but Friday’s consumer sentiment number had them bailing out of stocks, jeopardizing a summer rally that had lifted the Standard & Poor’s 500 index more than 15 percent in about a month.

Investors also sold off oil and other commodities and moved their money into the relative safety of the dollar and government bonds. Treasury prices jumped, sending their yields lower, while the dollar rose against other major currencies.

After rallying for months on expectations of an economic recovery, investors are worried that they have been too optimistic, given consumers’ continuing reluctance to spend. Analysts are predicting that the market may be choppy for several more months and this recession will continue to drage on with consumer confidence not as high as expected.

After the consumer forecasts were released the Dow Jones fell slighttly (0.8 percent). The S&P 500 index fell 8.64, or 0.9 percent, to 1,004.09, while the Nasdaq composite index fell 23.83, or 1.2 percent, to 1,985.52.

The drop erased much of the market’s advance of the last two days, and gave the big indexes their first losing week after four weeks of gains. The Dow was down 0.5 percent for the week, while the S&P 500 index fell 0.6 percent and the Nasdaq was off 0.7 percent.

In other trading, the Russell 2000 index of smaller companies fell 11.29, (or approximately 2%).

Bond prices rose sharply. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.57 percent from 3.62 percent late Thursday. The drop in the 10-year yield is good news for consumers because it is closely tied to interest rates on mortgages and other loans.