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This Week, Consumer Confidence Throws a Curve

The market shrugged off the news last week but sold off on Tuesday's Conference Board report.

Last week the market, in its wisdom, saw fit to ignore a report that showed consumer confidence sinking to a multiyear low. The second time around, that news elicited a much different reaction.

Tuesday's consumer confidence index for October came after other surveys showed that consumption was weakening prior to Sept. 11, but the Conference Board's report still caught economists and investors off guard. The index, the worst since early 1994, tumbled to 85.5 from 97 last month. Economists were expecting the index to fall to about 95. The expectations component, a barometer of future economic activity, fell to 70.8 from 78.1.

Investors, already shaken by vague warnings from the U.S. government of more terrorist attacks, used the report to get out of stocks. For the second consecutive session, the major equities averages were sharply lower by the 4 p.m. EST close of trading. The

Dow Jones Industrial Average dropped 148 points, or 1.6%, to 9122, following a decline of 2.9% on Monday. The

Nasdaq fell 32 points, or 1.9%, to 1667, on top of a 3.9% haircut in the prior session.

The latest confidence numbers boosted expectations that the

Federal Reserve will be more aggressive with interest rates when the

Federal Open Market Committee next meets Nov. 6. According to the fed funds futures, investors are pricing in a 57% chance the Fed could cut another 50 basis points from overnight bank lending rates, up from a 45% chance yesterday.

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Sell the News

But market strategists said today's report could spark further selling, especially because a rash of important economic data is coming this week, such as the October jobs report on Friday.

"Unfortunately, there are a lot of things the market needs to adjust to," said Arthur Hogan, chief markets analyst at Jefferies, though he added that over the last two days the market has been pricing in the likelihood of grim unemployment figures.

Stocks sold off Tuesday as Wall Street digested the implications of weak consumer confidence. "It's discouraging that the consumer is probably going to pull back from making purchase of any significance," said Peter Boockvar, equity strategist at Miller Tabak, adding that the report suggests the economy will remain sluggish.

Economists said today's report shows that consumers are increasingly worried about losing their jobs. "Widespread layoffs and rising unemployment do not signal a rebound in confidence anytime soon," said Lynn Franco, director of the Conference Board's Consumer Research Center, in a prepared statement.

Confidence Under Siege

Currently, 14% of consumers expect more jobs to become available, up from 12.9% last month. But 28.9% of those surveyed expect fewer jobs, up from 22.5% in the previous report. Only 17.7% of consumers anticipate a gain in their income, down from 21.1% in September. Meanwhile, survey respondents expecting an improvement in business conditions over the next six months increased to 18% from 15.7%, but those expecting conditions to weaken rose to 20.3% from 15.8%.

Threats to national security, such as the anthrax scare and the war in Afghanistan, have fueled pessimism among consumers, said Jennifer Rossum, economist at Thomson Financial/IFR. "I'm not overly surprised that consumers are on edge and cautious," she said.

But the Fed's rate cuts and the government's efforts to spur spending won't go far enough to renew confidence, some market strategists said. "We've had nine rate cuts already, and they don't seem to be catching our attention," Hogan said. "The market will be bolstered by positive economic data showing that the cuts are working. I think that's what we need right now, more than another rate cut."

As for the rest of this week, Wednesday's third-quarter gross domestic product report is "irrelevant," said Boockvar, because the data include the effects from the Sept. 11 terrorist attacks. Instead, Wall Street will be paying attention to other economic snapshots, such as Wednesday's Chicago purchasing managers index and Thursday's national purchasing managers' index, he said.

And the reaction could be harsh. "The market has gone up in a straight line, so I don't think it's necessarily prepared for more bad news," Boockvar said. "The market has more risk to the downside at this point."