Consumers apparently stole the punchbowl from the market's party last week, forcing the indices to close lower for the first time after four straight weeks of gains.

  • Dow: Down 0.52% to 9,321.4
  • S&P 500: Down 0.63% to 1,004.09
  • Nasdaq: Down 0.74% to 1985.52

Consumer sentiment fell to 63.2 from 66 in July, as measured by the Reuters/University of Michigan index. Analysts were expecting a rise. Retailers revealed a similarly gloomy sentiment in earnings reports last week.

Retail corner
Retailers continue to pursue tight inventory management and cost-cutting amid lackluster demand.

Even Wal-Mart (NYSE:WMT), retail's 800-pound gorilla, showed substantial weakness in consumer spending in its second-quarter earnings report, and the retailer's outlook suggests it doesn't expect recovery soon. The results are surprising; as consumers traded down in the wake of the recession, Wal-Mart's sales have risen. The company says it's still feeling pressured by the economy, noting that people are still purchasing basics, but not upgrading to discretionary items. The retailer saw same-store sales edge down 1.2% on weak spending and lower food prices.

Sales at Macy's (NYSE:M) continued to decline in the second quarter, falling 9.7%. The retailer did manage to keep gross margins flat, thanks to inventory management and cost controls. The retailer raised its fiscal-year earnings forecast thanks to sooner-than-expected cost efficiencies from closing buying offices.

Suppliers are suffering just as badly as retailers. Liz Claiborne (NYSE:LIZ), which makes goods for Macy's, posted its seventh straight quarterly loss, as sales fell 29%. Macy's is Liz's largest customer.

The luxury end of the market is still taking it in the chin. Thanks to tight inventory management and lowered prices to stay competitive, upscale retailer Nordstrom (NYSE:JWN) managed a better-than-expected second quarter. However, earnings per share still fell 26%, while sales slipped 6%. The company lifted its full-year earnings forecast to reflect better performance in the second quarter. That said, Nordstrom noted that consumers remain cautious, and the company doesn't expect that to change any time soon. 

Look at the back-to-school shopping season as a clue for consumer attitudes, and in turn the prospects for recovery. Unless sentiment improves, retailers could face another dreary back-to-school and holiday shopping season.

In other company news ...
BB&T (NYSE:BBT) has secured $20 billion in deposits and $22 billion in assets from Colonial BancGroup, after the Federal Deposit Insurance Corp. put Colonial into receivership. Colonial has branches in five states and will give BB&T exposure to the Texas market. Colonial is the sixth-largest bank failure on record.

BHP Billiton (NYSE:BHP) reported a 62% plunge in second-quarter net income, pressured by weak demand and falling prices. Revenue slumped 16%. The world's largest mining company said the past year was one of the worst it's seen. Even though inventories were beginning to refill around the globe, the company believes that's not necessarily a sign of rising demand from end users. However, BHP Billiton remains bullish on the long-term demand picture for commodities.

In another sign that the housing market may be improving, Toll Brothers (NYSE:TOL) reported better-than-expected orders, which increased 3%. The high-end homebuilder said sentiment appears to have improved, but traffic remains low.

What's ahead
This week brings housing starts, the producer price index, and the economic leading indicators report, all of which will continue to give us signs of whether recovery is indeed near. Hewlett-Packard, Deere and Heinz report earnings this week.

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Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. Wal-Mart is an Inside Value recommendation. The Motley Fool's disclosure policy is not entirely sure how this lampshade got on its head.