The Dow Gets Sentimental

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The Dow Jones Industrial Average is on track to close out this week at its lowest point since April. As of 11:45 a.m. EDT, it stands at a seven-point gain after falling more than 200 points yesterday. The index and the larger economy are suffering due to a shift in both investor and consumer confidence. With a very uneven recovery on their hands, both investors and consumers are being cautious with their money -- and it's evident in multiple segments of the economy.

A weak sentiment
This morning's Thomson Reuters/University of Michigan consumer sentiment index for August showed that the uneven economic recovery and anticipation of higher interest rates caused a five-point drop in consumer sentiment about the overall economy. Though July's reading of 85.1 was a six-year high, analysts had expected sentiment to continue rising, so the drop was unexpected. But despite the drop, the overall trend for sentiment is still high enough that economic expansion is expected to continue, though it may ease slightly.

Consumers may be focusing on big-ticket items while interest rates are still favorable, with automakers reporting a 14% increase in sales compared to the same time period in 2012. But the recent spate of retail chains' earnings reports has been telling a consistent story of consumers holding off or scaling back their purchases. Wal-Mart may have reported growth in its second-quarter earnings this week, but it also slashed its forward guidance for the remainder of 2013 in half. Citing similar factors as Macy's had earlier in the week, Wal-Mart was seeing lower traffic in its stores and declines in sales growth. Macy's also cut its forward guidance, to 2% for the full year.

Investors are wary too
For the past few years, investors were happy to see companies cut costs in order to boost their bottom lines. But as the economic recovery moves forward, investors are focusing their attention on revenue growth. Since cost-cutting can only go so far, expanding revenue is the key for profitability at any company. But with consumers being cautious, sales aren't growing at the pace that investors like to see, which can lead to stocks seeing red despite seemingly good earnings reports.

One segment of the market that delivered to investors in all areas is the big four banks. Bank of America was the last of the big four to report earnings, but it came out swinging. With both top- and bottom-line growth, investors were happy to see that the bank didn't focus all of its efforts on just cost-cutting -- though it did cut out $1 billion in costs.

Looking ahead
As the economy continues to move along, both investors and consumers will have to come to terms with the changing environment. And though the recovery may not be moving along as smoothly as everyone would like it to, confidence is an important underlying factor.

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Fool contributor Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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