Economic news sours investors

Associated Press

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 rose slightly Wednesday to snap an eight-day string of declines that sent prices down nearly 7 percent.

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 some of his 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 Barack 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.

“It just doesn’t seem like a formula for very happy times, for a long, long time,” says Shortt, a semiretired 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.

But investors such as 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. Another influential report is due Friday, when the government will release its employment data for July, which will include the unemployment rate and number of jobs created.

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.

The stock market’s fear gauge, formally known as the Chicago Board of Options Exchange’s Volatility Index, has risen to levels last seen in August 2010. The VIX, as market pros call it, is up 35 percent over the past eight trading days. In an unusually volatile market, investors are willing to pay hefty premiums for options that offer protection from price swings of stocks in the Standard & Poor’s 500 index.