The fear on Wall Street is that nervous consumers are going to short-circuit the economic recovery.
Stocks fell sharply Friday, taking the major indexes down about 1%, after investors were disappointed 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. 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 an unexpected decline in retail sales. 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% in about a month. Still, the indexes finished well off their lows of the day, a sign that the mood on Wall Street isn't all that grim, and light volume likely skewed price changes.
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 rocky for some time.
"Valuations were beginning to price in a sunnier a future, but not all the data is sunny yet," said Lawrence Creatura, portfolio manager at Federated Clover Capital Advisors, referring to stock prices. "There is still going to be a tug of war between good news and bad news as we move through the coming months."
The Dow Jones industrial average fell 76.79, or 0.8%, to 9,321.40 after falling as much as 165 points after the consumer sentiment survey was released.
The S&P 500 index fell 8.64, or 0.9%, to 1,004.09, while the Nasdaq composite index fell 23.83, or 1.2%, 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% for the week, while the S&P 500 index fell 0.6% and the Nasdaq was off 0.7%.
About five stocks fell for every two that rose Friday on the New York Stock Exchange, where consolidated volume came to a light 5 billion shares, down from 5.3 billion a day earlier. Light volume can exaggerate the market's movements.
In other trading, the Russell 2000 index of smaller companies fell 11.29, or 2%, to 563.90.
Bond prices rose sharply. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.57% from 3.62% 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.
On the New York Mercantile Exchange, gold and other metals prices fell, while oil prices sank $3.01 to $67.51 a barrel.
Stocks have had a difficult few days, falling in the early part of the week amid anxiety over what the Federal Reserve would say about the economy at the end of a two-day policy meeting. The market turned higher on Wednesday after the Fed reassured investors with a more positive stance on the economy than in the past. The market's gains spilled over into Thursday.
"This week was a great example of what will likely occur for the rest of the year," said Greg Reynholds, a vice president at Lenox Advisors. "Day by day, week by week, month by month we're going to have to try to find direction through this data jungle."
Investors have sent markets higher this summer encouraged by improvements in housing, manufacturing and corporate profits. But without the support of the consumer, the economy's recovery is in question.
"I think you're going to need to see a material stabilization in labor markets before you get meaningful and stable consumer confidence," said Stephen Wood, chief market strategist at Russell Investments. "And we're certainly not adding jobs and we're not even at a point where jobs are no longer being lost."
Stocks fell across the board Friday, with the biggest losses among financial, energy and material companies — industries that posted some of the biggest gains in recent days. Losses weren't as steep in more defensive areas like consumer staples and utilities, which tend to hold up better when the economy is weak.
In other economic news Friday, the Labor Department said the consumer price index was flat in July after a slight increase in June. That had little effect on stocks but did help bond prices. Wall Street also shrugged off a report showing a bigger-than-expected increase in industrial production as investors have come to expect an improvement in manufacturing.
Overseas, Asian markets were mostly higher, with Japan's main index hitting a ten-month high amid mounting optimism about a global economic recovery. The Nikkei stock average rose 0.8%.
European markets gave up early gains and finished lower. Britain's FTSE 100 dropped 0.9%, Germany's DAX index fell 1.7%, and France's CAC-40 lost 0.8%.