Consumer sentiment dropped to 54.9 from 63.7 in July, according to preliminary University of Michigan/Thomson Reuters index released Friday. Consensus had expected a reading of 61.
The consumer confidence gauge confirms my thesis, discussed here, that depressed investor, consumer and managerial sentiment in August would cause the economic data published in September to be horrible. I have argued that bad data releases between now and September represent a major headwind for the market that should last at least through September and makes it likely that the S&P 500 (^SPX) will visit the 950-1,020 area.
What should we make of the positive retail sales data for July published earlier today by the Commerce Department? The report shows that the economy seemed to be accelerating in June and July prior to the collapse in sentiment cause by the debt ceiling circus in the U.S., the intensification of the sovereign debt crisis in Europe and concomitant stock market collapses - all of which occurred in late July and early August - too late to have prevented a good retail sales print for July.
I fully expect the retail sales number for August, published in September, to be very gloomy. Furthermore, I believe that the first signs that sentiment is having a major deleterious effect on economic activity will be seen with the release of the new unemployment claims figures next Thursday.
As can be seen here, up until July 25, I was quite sanguine regarding the prospects of acceleration in growth in the U.S. I believe that my prior optimism was warranted and the retail sales figures released today tend to confirm that. However, since July 25, my outlook has changed due to changing events in the U.S. and Europe. I now expect a frightening deceleration of growth in August and this will raise the specter of potential recession.
The mere possibility of recession suggested by data published for the rest of August and September will be extremely frightening for markets since, this time around, there will be neither the financial wherewithal nor the political will for aggressive countercyclical policy measures.
Many stocks such as Microsoft (MSFT), Apple (AAPL), Intel (INTC), AT&T (T), Verizon (VZ) and even XLF are attractively priced at current levels. However, they should be available at much lower prices in the weeks ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.