U.S. stocks edged lower on Thursday as gloomy government reports on retail sales and employment undercut hopes that the economy was on the road to recovery.

But the overall decline was capped by Wal-Mart Stores Inc's better-than-expected quarterly results, which pushed shares of the world's largest retailer up 1.3 percent.

Retail stocks were one of the top drags, with the S&P consumer discretionary sector index <.GSPD> down 1.34 percent. A U.S. Commerce Department report showed total retail sales fell 0.1 percent in July when market forecasts called for a 0.7 percent gain.

Department store chain Kohl's Corp fell 2.74 percent to $50.84 after reporting a quarterly outlook before the bell that was below Wall Street's forecasts.

Also unexpected was the rise in the number of workers filing new claims for jobless benefits, which had been expected to drop.

Initial jobless claims and retail sales took a little bit of the air out of the rally here, said Alan Lancz, president of Alan B. Lancz & Associates Inc. in Toledo, Ohio.

One of the concerns for the market continuing the rally is, 'Is the consumer going to come back?' If that doesn't materialize, the market might be leading up to some disappointment.

Financial stocks gained, with Bank of America Corp rising 3.6 percent to $16.51 on news that hedge fund manager John Paulson, who made a fortune betting against financial companies after foreseeing the credit crisis, had stocked up the bank's shares during the second quarter. For details, see [ID:nN12401520]

Citigroup Inc was up 2.26 percent to $4.07 and Regions Financial Corp gained 4.98 percent to $5.06. The S&P financial sector index <.GSPF> was up 0.9 percent.

In the tech-heavy Nasdaq index, Apple Inc rose 1.28 percent to $167.40 after Barclays Capital raised its price target on the shares, citing upbeat long-term outlook for the company.

The Dow Jones industrial average <.DJI> was down 40.81 points, or 0.44 percent, at 9,320.80. The Standard & Poor's 500 Index <.SPX> was down 3.63 points, or 0.36 percent, at 1,002.18. The Nasdaq Composite Index <.IXIC> was down 6.77 points, or 0.34 percent, at 1,991.95.

U.S. stocks powered higher on Wednesday after reassuring comments from the Federal Reserve, erasing losses from earlier in the week.

(Additional reporting by Leah Schnurr; Editing by Padraic Cassidy)