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Investors' fear of recession sours market despite relief over debt deal

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 Obama reached the debt-ceiling deal.

Shortt kept selling because he worries about a growing risk that the economy will slip back into recession. He noted 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," said 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 like Shortt have become more cautious in response to troubling news.

Yet some sense an opportunity. The market research firm Birinyi Associates on Wednesday said market indicators that 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:

Stocks: The Dow Jones industrial average Wednesday finished up 0.3 percent. But it was down most of the day, which put the market at risk of posting its longest losing streak since 1978, the last time there were nine daily declines in a row.

After the recent losses, a broader stock index, the Standard & Poor's 500, is almost exactly where it started the year.

Investors withdrew a net of nearly $8.8 billion from stock mutual funds during the week that ended July 27, according to the Investment Company Institute. Investors also pulled money from international stocks funds, withdrawing a net $1.3 billion.

Gold: Prices hit a new record 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.

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.

Treasurys: 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.

Money-market mutual funds: Investors had been withdrawing huge sums from these investments a few days ago but reversed course once the debt-ceiling deal was signed into law. Money funds are typically safe places to stash cash, because they invest in only the safest forms of debt securities.

Volatility: 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.

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