Wall Street turns to consumers to gauge economy

NEW YORK — Wall Street heads into another turbulent week with investors set to pore over a government report on retail sales and earnings from Wal-Mart Stores Inc. to get a better reading on the consumer.

There are growing signs that the deepening economic slowdown has caused Americans to tighten their purse strings. There was fresh evidence of this past week when retailers posted the worst October same-store sales in 35 years — and analysts believe the upcoming holiday shopping season could be among the slowest in decades.

With consumer spending driving more than two-thirds of the U.S. economy, investors will be paying close attention to earnings outlooks for some of the nation's biggest retailers. Wal-Mart, the nation's biggest retail chain, will post results on Thursday. Kohl's Corp., JCPenney Co., Macy's Inc., and Abercrombie & Fitch Co. are scheduled to release reports as well.

Investors will get an overall picture of consumer spending on Friday when the Commerce Department releases its October retail sales index. The closely watched gauge is expected to show sales dropping 1.2 percent for the month after falling 1.2 percent in September. Excluding the battered automobile industry, sales are expected to have fallen 0.9 percent.

The market, still trying to recover from October's devastating losses, will likely zigzag as investors react to these reports. This has been the pattern during the past few weeks, with major indexes swinging from one extreme to another in capricious trading.

Many analysts believe this volatility is part of a bottoming-out process. The real test is to see in the coming days if investors have already priced in the potential for negative news or if fear of a protracted recession will trigger another stream of selling.

"The news is going to be really bad, and that shouldn't be a surprise to investors," said Peter Cohan, principal of Peter S. Cohan & Associates. "But, I'm feeling uncomfortable that the market is a daily mood ring for the economy. The small investors are largely out of the market, and what you end up with is a small number of very large players making decisions."

Cohan pins the volatility on hedge funds, pension funds, and big university endowments unloading stocks to raise collateral and scooping up undervalued stocks to seize opportunity. He believes this will eventually result in a more stable trading environment that will lure retail investors back, and add stability to major indexes.