BOSTON — What relief rally? Hope that the stock market would surge on news of Washington's debt ceiling deal has given way to pessimism. Increasingly defensive-minded investors are adapting to the reality that the economic recovery is stalling, if not ending.
Stocks plummeted for eight straight days, dropping prices nearly 7 percent, before rising Wednesday. They fell again Thursday.
That stumble complicates matters for investors who recently pulled cash from the market, fearing a government default was a strong possibility. With that worry behind, the question is what to do next.
Richard Shortt had expected to be buying stocks, putting his sidelined money back to work. Yet he was at his home computer Wednesday, selling stocks and trimming investments in stock mutual funds. The 66-year-old from Somerville, Mass., put the proceeds into safer money-market mutual funds — the same actions he took last week, when he sold stocks before Congress and President Obama reached the debt ceiling deal.
Shortt kept selling because he worries there's a growing risk that the economy will slip back into recession. He notes the debt deal emphasizes spending cuts, without revenue increases or stimulus spending that he believes is needed to create jobs.
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"It just doesn't seem like a formula for very happy times, for a long, long time," says Shortt, a semi-retired small business consultant. "I'm preparing for a long downturn, but leaving options open, to see if things do change."
Obama's spokesman said Wednesday that the administration doesn't believe there's a risk that the economy will head back into a recession.
Yet investors like Shortt have become more cautious in response to troubling news, such as Tuesday's report that consumers cut spending in June for the first time in nearly two years. A weak manufacturing report came out a day earlier, and the government last week said the economy's growth in the first half of this year was the weakest since the recession ended in June 2009.
Make lemonade
Yet some sense an opportunity. The market research firm Birinyi Associates on Wednesday said that market indicators it tracks suggest stock prices could be set to rebound. Birinyi said too many investors have left prematurely, which creates an opportunity for buyers.
Still, many are anxious. Investors withdrew a net of nearly $8.8 billion from stock mutual funds during the week that ended July 27, according to the Investment Co. Institute. Investors also pulled money from international stocks funds, withdrawing a net $1.3 billion.
Golden touch
Meanwhile, gold prices hit a new record on Wednesday, not adjusted for inflation, topping $1,670 an ounce. Gold prices have risen nearly 13 percent since July 1 and have steadily risen since the start of 2009, when an ounce of gold sold for $880.
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Investors believe gold is safe because it tends to hold its value when stocks are falling and often rises when the dollar falls in value against other currencies, as it did Wednesday.
Also, prices for Treasury bonds have been rising since the debt deal concluded, reflecting greater investor demand for the government IOUs. Their reputation as a safe haven has been renewed now that the government avoided a default.
