NEW YORK (TheStreet) -- A surprise drop in consumer confidence gave a shock to markets on Tuesday, conflicting with investors' optimism over the return of the spend-happy shopper.
November consumer confidence fell to 88.7, down from 94.1 in October and its lowest level since June, far below economists' expectations for an increase to 96. Rosier forecasts had been predicated on the view that recent declines in oil prices would bolster consumer spending.
Though the drop was unanticipated, optimistic forecasts for consumer spending growth over the critical holiday shopping season remain unchallenged.
"If people have money, they'll spend it," said Eric Marshall, portfolio manager at Hodges Funds, in a call. "We're more optimistic about what we're hearing from the retailers, restaurant companies and consumer product companies this year versus last year."
Of course, it helps that consumer spending this quarter has the advantage of an easy year-on-year comparison. Shopping malls were deserted last year as consumers struggled with harsher-than-normal winter storms and an unemployment rate stubbornly sticking around 7%.
Consumer spending was one of the better-than-expected components of third-quarter GDP data out Tuesday morning. Spending increased 2.2% over the quarter, compared to an initial estimate of 1.8% growth, according to the Department of Commerce.
"We are actually looking for a modest shift up in consumption. That will start in the fourth quarter," RBC Capital Markets' Tom Porcelli told CNBC. "We are looking for this modest acceleration to 2.5% [over the quarter]." Porcelli added that through to 2015, consumer spending could increase to 2.7%.
An overall improving economy also bodes well for the holiday season. Third-quarter GDP was upwardly revised to 3.9% from an initial reading of 3.5%, topping even the most generous estimates. Economists surveyed by Bloomberg predicted a range of 3% to 3.8% with a consensus of 3.3%.
"Hearty, positive revisions in nearly all key categories of growth [suggested] the economy was on firmer footing than originally expected at the start of the second half," Sterne Agee's chief economist Lindsey Piegza wrote in a note.
Hopes for how much extra cash the holiday season could generate were pushed even higher on Tuesday as oil prices continued their fall. Crude plunged ahead of a meeting of the Organization of the Petroleum Exporting Countries in Vienna on Thursday to determine whether to cut production to address a supply glut. Individual meetings between Saudi Arabia, Venezuela, Mexico and Russia have failed to come to any solution.
West Texas Intermediate crude was down 2.5% to $73.91 a barrel by market close. Since midyear, prices have plummeted more than 30%.
Oil companies and refineries tumbled. Chevron (CVX) - Get Report dropped 1.2%, Exxon Mobil (XOM) - Get Report fell 1% and BP (BP) - Get Report slipped 1.1%. The Energy Select Sector SPDR ETF (XLE) - Get Report slid 1.6%.
Better-than-expected GDP figures failed to set off a rally on Tuesday, with some investors spooked it could mean a return to normal monetary policy for the Federal Reserve sooner than expected.
The S&P 500 closed 10% lower. The Dow Jones Industrial Average added just 0.02% which, though small, was enough to notch another all-time high for the index after a record close on Monday. The Nasdaq added 0.07%.
"Good news on GDP was actually negative for equity investors," Chris Gaffney, senior vice president at Everbank, said in a call. "Stronger U.S. economy worries investors in that they believe that interest rates will start rising sooner."
"This report may push the Fed to raise rates a little sooner than what they had planned, although I think they're focusing still on wage inflation. That's going to be the trigger for them to start raising rates," he added.
The Fed should raise its fed funds rate by 25 basis points in June 2015, to 1% by the end of 2015 and to 2.75% by the end of 2016, Wells Fargo analysts forecast in a research report Tuesday.
--Written by Keris Alison Lahiff in New York.