Stocks drop as investors worry about consumers

NEW YORK -- 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.