updated 8/16/2009 1:59:05 PM ET 2009-08-16T17:59:05

On Wall Street, the average shopper can trump a Federal Reserve policy maker.

Major Market Indices

With other parts of the economy showing signs of improvement, the question of when a recovery will occur and how strong it will be lies with consumers. So reports last week showing weaker-than-expected retail sales and flagging consumer confidence overshadowed an upbeat view of the economy from the Federal Reserve. The major indexes ended the week with a loss of about half a percent, their first weekly losses in five weeks.

"Anything pointing to the health of the consumer and its willingness to spend is going to be watched closely," said Ryan Jacob, president of Jacob Asset Management in Los Angeles.

This week, the consumer is in focus again as a stream of retailers report second-quarter earnings. Wall Street will want to know if retail companies, like businesses in other industries, made money primarily because of cost-cutting rather than from improved revenue or sales.

The nation's biggest retailer, Wal-Mart Stores Inc., last week followed the trend set by other companies, reporting earnings that beat Wall Street forecasts but also saying that its most important sales, those from stores open at least a year, fell during the quarter. And it's likely that other retailers still to announce results will continue that pattern.

Eventually, investors will need to see rising sales in order to become confident about the economy's ability to show sustained growth. Consumer spending accounts for more than two-thirds of the nation's economic activity.

"We'll get a very good range of what retail sales actually look like" this week, said Jamie Cox, managing partner at Harris Financial Group in Richmond, Va. Cox noted that retailers from across the pricing and product spectrum are reporting results.

Off-price retailer TJX Cos. and the high-end Saks Inc. report results Tuesday, while apparel retailer Gap Inc. provides its earnings data on Thursday. Home improvement retailers Lowe's Cos. and Home Depot Inc. also release results this week, as do Target Corp., BJ's Wholesale Club and Barnes & Noble Inc.

Stock gains were muted after the Commerce Department said Thursday that retail sales fell 0.1 percent in July, significantly worse than the 0.7 percent increase economists expected. The news was bad again Friday, when a new reading on consumer sentiment was much lower than expected. Major indexes tumbled about 1 percent that day.

News of the Reuters/University of Michigan consumer sentiment survey wiped out the surge of optimism the market had after the Federal Reserve on Wednesday said the economy was "leveling out."

Cox said there is a split between Wall Street and Main Street over the economy's potential recovery. The rally that began after the stock market bottomed out in early March shows investors are confident a recovery is coming in the near future, while the average American is a bit more cautious, he said.

Friday's consumer sentiment report was a jolt for traders about exactly how uncomfortable consumers still are with their finances and the state of the economy.

One of the biggest worries for people is the job market. Jacob said that while growing consumer confidence would be a welcome sign for the market, "with unemployment still trending higher, it's hard to expect too much progress."

Harvey Robinson, chief investment officer at Robinson Capital Group in Dayton, Md., said that because of questions about the job market, there is still no clear sign about the timing or strength of a recovery.

Weekly unemployment data last week showed an unexpected rise in the number of workers filing for jobless benefits for the first time. The next report on jobless claims will come out Thursday.

Though job growth typical lags behind as the economy recovers, improving unemployment reports could give consumers a confidence boost. Until that happens, however, markets could be volatile and the five-month rally might slow, analysts said.

However, strength in new housing and manufacturing data during the week could provide investors with more reasons to bid stocks higher. The market will get readings on housing starts and existing home sales as well as two regional manufacturing reports.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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