Stocks drop on weak consumer sentiment

NEW YORK (AP) - Investors are finding disappointment everywhere and taking out their frustration on stocks.

Stocks slumped Friday after banks' second-quarter earnings fell short of expectations and a new survey found that consumers are becoming more pessimistic. The Dow Jones industrial average lost 261 points, and all the major market indexes dropped more than 2.5 percent. Interest rates fell in the Treasury market as investors once again sought the safety of government securities.

The market fell at the opening after Citigroup Inc. and Bank of America Corp. released earnings. The two banks, like JPMorgan Chase & Co. a day earlier, reported higher earnings as losses from failed loans fell. But they are also seeing lower trading revenue because of the stock market's plunge this spring. The drop in revenue raised questions about how banks will be able to make big profits if trading is curtailed by new federal regulations.

Stocks fell further after a twice-monthly survey from the University of Michigan and Reuters found that consumers' gloom is increasing. An index of consumer sentiment compiled from the survey fell to 66.5 in early July from 76. That was a bigger drop than expected.

"It's mostly about the poor consumer confidence numbers," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. "The possibility of a double dip also starts to come to mind" for investors, he said, referring to a phrase that describes the economy falling back into recession.

The unexpectedly low reading on consumer confidence "spooks people and reinforces fears that the economy is slowing too much too fast," said Scott Marcouiller, chief technical market strategist at Wells Fargo Advisors.