For Stocks, 'This is Where it Gets Interesting'

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It turns out the U.S. defaulting on its debts may have been the least of our economic worries.

Another global recession? A rapidly escalating European debt crisis? A stagnant U.S. labor market? Now those are concerns. And theyre not going away.

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Amid what one trader called the constant deterioration of global economics, stock and commodity prices plunged around the world Thursday.

Lost temporarily beneath the noisy debate over raising the U.S. debt limit was the very real threat of another global recession. Those fears have crystallized now that the dust has settled on what many believe was a disappointing U.S. deficit reduction deal. And with those broader and more systemic fears rising to the surface, investors are panicking.

Teddy Weisberg of Seaport Securities said there hasnt been any good economic news for weeks and  theres no reason to believe theres any on the short-term horizon.

The market is a forward looking mechanism and all of the sudden the picture looking forward has become very cloudy, he said.

Weisberg said the worst recent news, somewhat buried beneath the debt hubbub in Washington, was the downward revision of U.S. first quarter GDP. Naturally, thats forced a more pessimistic reassessment for the second half of 2011 and investors dont like it.

I dont know what its going to take but were not out of the woods yet, he said. I just think investors are fed up. Its a case of 'you keep the cheese, let me out of the trap'.

The veteran trader said the extended and often-polarizing tone of the debate in Washington appears to have tarnished our image internationally and added to concerns that no one has any answers for the global economic malaise.

This debt ceiling process was so disturbing, so taxing that it diminished a lot of confidence in the political process in this country. It sent a very negative message to the rest of the world. Where are the adults? Wheres the leadership? he said.

In afternoon trading Thursday, the Dow Jones Industrial Average was down 385 points. The technology-heavy Nasdaq stock market was faring just as bad, down about 2.75%, its worst day in a year.

In the past two weeks stocks have lost nearly all of their 2011 gains. The S&P 500, widely viewed as the strongest barometer of the health of U.S. stocks, is approaching a decline of 10% for the year, commonly known as a correction.

Put another way, stocks are having their worst run since October 2008, during the darkest days of the financial crisis.

Oil fell $4.19, or 4.6%, to $87.74 a barrel in midday trading on the New York Mercantile Exchange on fears that a global economic slowdown will curb demand. Earlier this year oil surged as political unrest in the Mideast caused supply disruptions. But those concerns pale in comparison to another global recession and the price of oil has plunged according.

Energy and materials stocks such as Chevron (NYSE: CVX) and Alcoa (NYSE: AA) were leading the equity markets downward. If the world is headed into another recession, companies in those sectors will be among the first to feel the pain.

Even gold was down. Often viewed as the ultimate safe haven in scary times, after touching an all-time high of $1,684.90 earlier in the day, gold tumbled and wound up losing about $6 an ounce.

U.S. stock markets were following the lead of European stocks, which tumbled earlier today on increasing fears that Italy and Spain are tripping down the same debt-ridden path as Greece and Portugal. Italy and Spain are much larger economies than Greece and Portugal, so defaults by those governments would have a huge ripple-effect throughout an already beleaguered Europe.

The European debt-contagion has some suggesting that the Eurozone may be headed toward a split, as richer nations such as Germany tire of bailing out their poorer neighbors.

In the U.S., a better-than-expected report on last weeks jobless claims released Thursday morning did little to allay fears that tomorrows July employment numbers will reveal an essentially stagnant U.S. labor market.

At best, economists are predicting the unemployment rate will hold steady at 9.2%. A deluge of lousy economic data released in the last month provides no reason to believe there will be a surprise to the upside. To the contrary, its far more likely the numbers will disappoint, as they did a month ago.

Frank Davis, director of sales and trading at Lek Securities in New York, said Thursdays downturn looks like the tail end of a healthy selloff ahead of the job claims tomorrow.

In other words, professional traders are protecting their portfolios against more expected bad news on Friday.

If, as expected, the jobs report is disappointing, it adds yet another layer of bad news to an already-fragile investing landscape, according to Davis.

Its classic momentum to the downside, he said. I daresay this is where it gets interesting.