Stocks Dive as Consumer Spending Worries Mount

Stocks plunged Friday, erasing all of the previous day's big gains, as a drop in consumer spending made investors nervous the recovery momentum can’t be sustained.

Major stock indexes tumbled more than 2 percent in afternoon trading, including the Dow Jones industrials, which gave back all of Thursday's 200-point gain, and dropped an addition 50 points. Big decliners were banks, energy and materials companies. As stocks fell, investors moved to safer assets like the dollar and Treasury bonds. The decline in stocks came after a rally yesterday, based on a 3.5% GDP growth number.

Personal Spending Falls
Investors sold stocks after the Labor Department said personal spending fell 0.5 percent in September. This number was about where the forecasts said it would be, but it was the largest drop in the last three quarters and followed a 1.3 percent jump in August that was led by the government's “Cash for Clunkers” car rebate program, which was very popular.

The report casts doubt on the economy's recovery, which many economists fear has been primarily inflated by government stimulus programs. With no bounce in consumer spending, which makes up a major part of the U.S. economy, investors are worrying the recovery can’t last.

The Dow fell 249.85 points to 9,712.73, led by news of a drop in the mood of consumers. The Reuters/University of Michigan consumer sentiment index fell to 70.6 in October from 73.5 in September.

The Labor Department also reported Friday that personal income, which will drive a recovery by consumer spending, was flat in September compared with the previous month, although this was in line with expectations. A lack of income growth is due, in part, to ongoing high unemployment rates, also a major worry for the market.

Financials Decline
Financial stocks were among the day's biggest decliners. Shares of CIT Group Inc. dropped nearly 15 percent after the commercial lender said Carl Icahn, a major investor in the firm, agreed to support its restructuring plan and provide it with a $1 billion line of credit. CIT Shares dropped 14 cents to 81 cents.

Energy and basic materials producers also fell sharply as the dollar gained ground against other major currencies. On the New York Mercantile Exchange, gold prices slipped about $9 to $1,037 an ounce, and oil prices tumbled $2.85/BBL to $77.02.
Bond prices rallied as stocks fell. The yield on the benchmark 10-year Treasury note fell to 3.42 percent from 3.50 percent late Thursday.

Stocks have has a rough week, but finished the month slightly up from September’s close. Without stronger evidence that the labor market is improving, consumers are not going to feel comfortable about spending. Indications are investors will have trouble extending the market's massive rally into a ninth month. With this week's declines, the S&P 500 index is still up roughly 55 percent since hitting a 12-year low in early March.

Major Economic News Due this Coming Week
Analysts say trading is likely to remain volatile this coming week. There is a large quantity of major economic news coming this week. Two that will be closely watched are sales reports from major retailers and the Labor Department's October employment report — arguably the month's most important piece of economic data. The Fed will also convene for a two-day policy meeting beginning Tuesday.

There were eight losers for every winner on the New York Stock Exchange, where volume came to 791.6 million shares, compared with 852.5 million at the same time a day earlier. Overseas, the averages were mixed, with Japan's Nikkei stock average rising, while European markets in Britain, France and Germany fell.