World Markets Staggered by Weak Consumer Data

As the debt limit drama ended in Washington, storm clouds thickened in the financial markets.

weak consumer dataThe broader United States stock market dropped 2.6 percent, erasing all of its gains for the year. That capped a string of declines over seven consecutive days, its longest losing streak since October 2008.

Fears of a sovereign default in either Italy or Spain re-emerged, and the interest rates on those countries’ bonds soared. United States Treasury yields fell sharply to their lowest level in nearly a year as investors fled to the safety of American assets but also fretted over sclerotic economic growth. Gold, seen as another safe haven, leapt to a record high.

European markets initiated the descent and the United States soon followed, despite Senate approval of an agreement to lift the debt ceiling and cut more than $2 trillion from federal spending.

The markets and the breaking of the budget impasse have been overwhelmed by bad economic news and the chances of more. On Tuesday, a report showed consumers cut spending the most in nearly two years. Attention turned to Friday’s report on unemployment.

Market analysts and economists made clear that even though the debt limit agreement averted a potential default on United States debt, the drawn-out process had taken its toll.

“As the macro data comes out, it seems like we may have more on our hands than just getting the debt ceiling raised,” said Myles Zyblock, chief institutional strategist and managing director of capital markets research at RBC Capital Markets.

“We get no default, but the bad news is there is a growth trade-off,” he said. “They had to agree on fiscal contraction that would weigh on growth.”

Stanley Nabi, the chief strategist for Silvercrest Asset Management Group, said he was starting to hear the word “recession” in questions from clients over the last few days.

Recent economic data is already weak, he said, noting the G.D.P. revisions on Friday that indicated the recession was deeper and the recovery more fragile than originally thought. On Tuesday, the Commerce Department said personal spending fell 0.2 percent in June, the first time it has declined since September 2009. And now that the debt ceiling deal has offered up the prospect of lower spending from the government, Mr. Nabi said, “Who is going to drive the economy?”

“You can’t rely on capital spending,” he said. “Trade is not strong enough to make that much of a difference. As far as the economy is concerned, what the data is showing is the economy has no momentum.”

Lawrence Creatura, portfolio manager at Federated Investors, said, “The challenges that we are facing economically are that the hits just keep coming. We do have somewhat of a resolution to our budgetary impasse, but that does not overwhelm the fact that, economically speaking, that the data continues to deteriorate.”

The Standard & Poor’s 500-stock index was down 32.89, or 2.56 percent, at 1,254.05, erasing all of the gains it had made this year. The Dow Jones industrial plummeted 265.87 points, or 2.19 percent, to 11,866.62, with a big dropoff toward the end of trading. And the Nasdaq index fell 75.37 points, or 2.75 percent, 2,669.24.

As the markets spiraled, analysts sifted through indexes, graphs and numbers, trying to balance risk and opportunity.

Stephen Wood, the chief markets strategist for Russell Investments, noted that the so-called fear index, or Vix, was “bouncing around a lot.” It was down at 24.67, below its high for the year, but also up from the last few weeks when it had hit the teens, even as low as 14.62 at the end of April.

“This is a risk-on, risk-off market,” Mr. Wood said. “You see waves of risk acceptance, then risk aversion.

“My take on it is volatility will be your constant travel companion,” he said, listing the recent euro zone problems, the latest debt ceiling debates, talk of a United States credit downgrade and the potential for an economic slowdown ahead.

“A lot of these variables need to be priced in,” he said.

The benchmark 10-year Treasury was at 2.61 percent, compared with 2.75 percent late on Monday. For the month of July, the note was down 37 basis points to 2.80 percent, compared with 3.17 percent in June.

Analysts said that the yields showed them that even as the instruments might have been in the line of fire of any government default, their price rose, suggesting economic growth concerns were overriding.

“The bond market has a very loud voice,” Mr. Wood said. “And the bond market is telling us that the bond market is more worried about the global economic slowdown than it is about downgrade or default.”

One of the largest looming economic indicators in the United States comes on Friday, when the Labor Department releases its national report on jobs, with estimates that the economy added 85,000 nonfarm payrolls in July, according to a Bloomberg News survey, compared with the 18,000 tacked on to payrolls in June.

Keith B. Hembre, the chief economist and chief investment strategist at First American Funds, said the behavior of the market on Tuesday is “a bit different than the crisis feel.”

“It seems there is an asset allocation change going on oriented around lousy economic data recently, and perhaps there is some prepositioning to that and the expectation of numbers coming in well below the consensus,” he said, referring to Friday’s job report.

Still, one bright spot might be the corporate sector. Second-quarter earnings are on the verge of setting a record, and records are also expected for the remaining two quarters of this year, according to a recent survey by Howard Silverblatt, S.& P.’s index analyst.

But even that could be in flux.

Uri Landesman, the president of Platinum Partners, said that investors were discounting the news of the debt deal and, with such poor economic data, starting to question the viability of corporate earnings for the second half of the year.

Economic data has been a disaster,” he said. “It’s clunker after clunker.

“If the economy is desultory, how are the earnings going to excel?”