Just hours after President Barack Obama signed the controversial debt-limit bill into law, which was supposed to settle market jitters about a potential U.S. government default, shaky investors sent the Dow into a 265.87-point dive, and it finished the day at 11,866.62.
Wall Street appeared stonily unimpressed with the debt accord’s becoming law, sending the markets into a drop amid a flurry of other dismal economic reports, economic experts said. In addition to the Dow’s 2.2 percent drop, the Standard & Poor's 500 index fell 32.89 points, or 2.6 percent, to 1,254.05. And the Nasdaq composite fell 75.37, or 2.8 percent, to 2,669.24.
By Wednesday morning, world markets were on no better footing. European shares fell sharply, tracking steep price falls on Wall Street and Asia, on escalating worries about the global economy after a raft of weak data and fears over the euro zone debt crisis spreading to Italy.
The United States stepped back from the brink of default but congressional approval of a last-ditch deficit-cutting plan failed to dispel fears of a credit downgrade and future tax and spending feuds.
"It's a lower, slower world," said Justin Urquhart Stewart, director at Seven Investment Management. "The corporate results are telling us a not bad story but that's the rear view. The outlook is lower and slower."
"The U.S. debt issue has not been resolved. There's a new bandage, but no one is looking at the festering wound underneath. U.S. debt wiIl be downgraded. It's just a question of when."
On Tuesday, Moody's Investors Service confirmed its triple-A rating of the United States, citing the decision to raise the debt limit so the Treasury can keep servicing the nation’s debt obligations. However, Moody’s assigned a negative outlook to the rating, putting pressure on lawmakers to create a long-term fiscal consolidation plan.
Moody’s might be putting pressure on lawmakers, but the president indicated they can take a break now that they’ve raised the debt ceiling by $2.4 trillion.
“When Congress gets back from recess, I will urge them to immediately take some steps — bipartisan, common-sense steps — that will make a difference, that will create a climate where businesses can hire, where folks can have more money in their pockets to spend, where people who are out of work can find good jobs,” he said in his speech after the Senate passed the bill.
The recess, which is scheduled to start Aug. 8, lasts until after Labor Day.
Editor's Note: 50% unemployment, 90% stock market drop, 100% inflation.
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After the markets closed, analysts turned wearily to what The New York Times described as the next, perhaps more important, task: determining how the new debt-ceiling law will affect the economy. The numbers continue to tank, with unemployment stubbornly staying above 9 percent and Obama stimulus measures faltering at creating jobs.
Uri Landesman, president of Platinum Partners, told the Times that investors are discounting the debt deal and questioning the potential corporate performance for the rest of the year.
“Economic data has been a disaster,” Landesman said. “It’s clunker after clunker. If the economy is desultory, how are the earnings going to excel?”
Stanley Nabi, chief strategist for Silvercrest Asset Management Group, told the Times that clients have been asking him about the potential for another recession.
As if to dismiss the debt deal, Nabi huffed: “That was yesterday’s story. Today’s story is what is going to happen on the economy.”
What could happen is a double-dip recession, partly because of financial strain at the state and local levels, Meredith Whitney, head of Meredith Whitney Advisory Group, had predicted on Monday.
"I think you are getting increasing signs that we are really at risk for a double dip because our GDP number on Friday was an indication that states and local governments, 12 percent of GDP, are really pulling back," Whitney told CNBC.
Several weak economic reports and poor earnings news from several big companies also were blamed for Tuesday’s markets spiral.
The Commerce Department reported that consumers cut their spending in June for the first time in nearly two years. Analysts had predicted a slight increase. Incomes also rose by the smallest amount since September, reflecting a weak job market.
That bleak news came one day after a weak manufacturing report. And on Friday, the government said the economy grew at its slowest pace during the first half of the year since the recession ended in June 2009.
“The market is starting to wonder where the growth is going to come from,” said Nick Kalivas, a vice president of financial research at MF Global. “It hasn’t hit the panic button yet, but that’s where we’re drifting.”
The market reaction seemed to reflect the risk-reward potential chronicled in a Wall Street Journal analysis of the debt negotiations on Monday.
“The agreement could immediately lift the cloud of uncertainty over the economy,” wrote the Journal’s Zachary A. Goldfarb. “It would end a political stalemate that could have caused the United States to default on its obligations for the first time. Over the long term, the deal could help free the nation from what is fast becoming a crushing debt.”
On the other hand, Goldfarb noted, many economist contend that “the agreement could endanger the anemic economic recovery — because of both what the deal includes and what it doesn’t. The government would cut back on spending, which has softened the blow of the slowdown, while failing to renew measures, such as a payroll tax cut, that have put money in consumers’ pockets.”
Editor's Note: Economic Meltdown to Unravel in 2012.
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