Handle With Care: Market Crash Underscores — and Perhaps Causes — Fragile Consumer Confidence

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Wells Fargo stock market analyst Al Goldman, who’s followed stocks for 50 years, once said, “Two emotions rule the stock market. One is greed and one is fear.” Make no mistake, greed is still alive and well on Wall Street. But fear is driving the bus right now, despite the modest bounce-back of today’s morning trading.

In fact, a big worry among market watchers is that the declines of recent weeks, driven by fear, could trigger even more fear — a kind of vicious cycle that affects not just the stock market but the economic behavior of consumers as well.

In particular, studies show the link between consumer sentiment and the stock market is tighter than a barnacle attached to the hull of a boat. London-based Capital Economics estimates that recent declines in the stock market could curb U.S. consumer spending by $140 billion in 2012 alone. If that came to pass, Capital Economics says that U.S. gross domestic product would be cut by half-a-percentage point over the next 18 months.

(MORE: Stock Market Plunge: Can the Fed Do Anything?)

Consumer confidence is already at its lowest level since July 2009, according to the Thompson Reuters/University of Michigan survey of consumer sentiment. And it tends to decrease during stock market declines. Lower confidence leads to higher savings rates and lower spending and can easily trigger a contraction in economic growth. And that, in turn, would likely lead the market lower still.

Until the Great American Consumer gets his and her confidence back, expect more of the same.

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