US stocks drop after investors react to consumer worries

US stocks fell sharply today after investors were disappointed by media reports that the Reuters/University of Michigan index of consumer sentiment fell 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 US 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 today’s consumer sentiment number had them bailing out of stocks, jeopardising a summer rally that had lifted the Standard & Poor’s 500 index more than 15% 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 were too optimistic, given consumers’ continuing reluctance to spend.

“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.

About four stocks fell for every two that rose on the New York Stock Exchange, where volume came to a light 1.09 billion shares. 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 on 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.