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Stocks plunge; S&P turns negative for 2011

By Cezary Podkul,

Stocks posted their worst daily decline in nearly a year Tuesday, wiping out the year’s gains and raising fresh questions about the strength of the economic recovery.

Despite the seemingly positive news that President Obama signed the long-awaited agreement to lift the federal borrowing limit, the Standard & Poor’s 500-stock index tumbled 2.6 percent — its seventh straight day of losses, making for its longest losing streak since October 2008. The Nasdaq composite index tumbled 2.7 percent, while the Dow Jones industrial average dropped 2.2 percent.

The declines were the worst in nearly a year for both the S&P and the Nasdaq. They also put the S&P in the red for 2011.

Stocks fell in Asia, where Japan’s Nikkei 225 dropped 2.04 percent in early trading Wednesday. Stocks in South Korea, Singapore and Australia also slumped.

Analysts blamed the U.S. declines on rising worries over the health of the economy, which has come into renewed focus now that Washington has resolved its months-old fight over the country’s borrowing limit.

“I think the market has been surprised by the economic data, and I think they are becoming more concerned about the economic outlook,” said Paul Dales, U.S. economist at the Toronto forecasting firm Capital Economics.

The key data point giving markets concern Tuesday was a report from the Commerce Department showing that consumer spending declined 0.2 percent in June. The dismal reading was far worse than expected, marking the third straight economic indicator in as many business days to come below expectations.

Monday’s manufacturing report indicated activity was barely above recession levels, while Friday’s report on gross domestic product showed that the economy grew at a snail’s pace of 1.3 percent in the second quarter.

And although many companies have reported strong profits, that hasn’t necessarily translated to more jobs. In fact, some of the world’s largest multinationals — including Cisco, Research in Motion, Bank of America and HSBC — have announced large layoffs in the United States in recent weeks.

But the consumer-spending report was particularly rattling, according to economist Joshua Shapiro of forecasting firm MFR, because consumer spending accounts for 70 percent of the GDP.

“If 70 percent of GDP is going nowhere, then it’s pretty easy to see the overall economy is anemic,” Shapiro said. “We are operating just above stall speed right now, not much above it.”

The economic fears are sending investors toward safe havens. Gold, long considered a safe store of value, climbed 1.4 percent to $1,641.90, according to Bloomberg data. And yields on the 10-year Treasury slid to 2.61, a new low for the year. A lower yield means investors are willing to accept a lesser return in exchange for the safety of holding government debt.

Investors also reflected economic fears in their trades Tuesday by sending the S&P below 1258, said Philip Roth, a chartered market technician with trading firm Miller Tabak in New York.

Roth said 1258 was a “support level” for the market, or a benchmark based on the index’s lows since March. Now that it’s been breached, Roth predicted, the market is likely to change direction and may slide an additional 10 to 15 percent.

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