Economic and Deflation Worries Drop Stocks 3.3% This Week


The bear came back with a roar this week. Just one week earlier, better-than-expected corporate earnings sent stocks soaring. But this week, renewed worries from the Fed about a slowdown in the U.S. economic recovery sent stocks falling about 375 points over a three-day period. For the week, the blue-chip Dow Jones Industrials ($INDU) average was down 3.3% to 10,303.15. The broader S&P 500 ($INX) fell 3.8% to 1,079.25 and the tech-heavy Nasdaq ($COMPX) fell 5% to close at 2,173.48.

Besides the view from the Fed, things got even worse when Cisco (CSCO), which reported strong earnings, disappointed on revenue and warned that it saw signs of a slowdown in corporate spending. That sent shares down 10%, and further spooked the market.

Stocks ended the week trying to make sense of a slew of economic data:

  • U.S. retail sales were up in July by 0.4% over June, but that didn't mean consumers were shopping more at retail stores. Most of that increase came from car dealerships and higher gasoline prices. Outside of those areas, retail sales actually fell 0.1%, one result of high unemployment.

  • High gas prices also contributed to an increase in the consumer price index, which was up 0.3% in July. If you take out gasoline and some volatile food prices, the CPI was up 0.1%, which is negligible.

  • While consumer sentiment beat expectations, there wasn't much to cheer about given that the early August reading of 69.6 followed a drop in July to 67.8, the lowest level since November.

  • Finally, U.S. business inventories rose 0.3% in June to $1.36 trillion -- their highest level in a year. That came after a 0.2% rise in May. At the same time sales fell. The worry: Consumer demand was less than businesses had expected.

The sobering week has investors back to thinking about the prospect of deflation. Fact is, uncertainty rules the market right now, and there is no clear indication that the economy is improving -- or that things are getting terribly worse. As a result, investors continued to flock to the safety of the dollar -- which rose to 1.2750 against the euro, its highest since July 22 -- and the 10-year Treasury note. The yield on the 10-year closed the week at 2.68% -- its lowest level in 16 months.

For more, on the week's market action, see video: