By John W. Schoen Senior producer
msnbc.com
updated 8/4/2011 11:46:51 AM ET 2011-08-04T15:46:51

It's a scary time for investors in the stock market.

Major Market Indices

Despite this week's 11th-hour deal to prevent a federal default, many of them have headed for the exits, unnerved by fresh jitters about Europe and mounting evidence of a slowing U.S. economy.

The stock market tumbled on Thursday after breaking an eight-day losing streak Wednesday with a marginal gain for the day.

Since July 22, the slide has erased roughly $1.2 trillion in market value, based on a 7 percent decline in the Willshire 5000 index, which tracks the bulk of the stock market's value.

Investors cashed out nearly $23 billion in stock holdings from mutual funds in June, the latest data available from the Investment Company Institute. Last week, workers with 401(k) accounts picked up the pace of stock sales, shifting money to cash or bond accounts. The money flow out of stocks was the third highest since 1997, according to Aon Hewitt, which tracks the accounts of 4.7 million workers.

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Story: Stock markets have terrible day; Dow drops 500 points

Some investors have been flocking to gold, which moved higher again Wednesday. Gold prices have risen 25 percent in the last six months.

Here's what has stock investors spooked:

Deficit doubts
Tuesday's budget deal between Congress and the White House was hailed in Washington as a resolution of the months-long battle that brought the government to the brink of insolvency. But the agreement did little to lift the clouds of uncertainty over exactly what government spending will be cut.

Defense contractors, state governments and jobless workers, to name just a few, have been left in limbo, unsure whether the budget ax will cut off critical cash from Washington. Those spending cuts won't be finalized until the end of the year.

If the plan is fully enacted, the deficits would shrink by less than $3 trillion over the next 10 years. That's less than the $4 trillion that bond rater Standard and Poor's said was needed to renew the government's AAA bond rating. It also fell short of what some investors were looking for.

"You saw that we didn't tackle the entitlement programs: no Medicare, Medicaid; no Social Security," said Steve Grasso, head of institutional sales at Stuart Frankel. "I don't think the markets like what they got out of it. That's why you see gold rising and equities falling."

U.S. slowdown
After a convincing pick-up in growth last year, the U.S. economy appears to have stalled out. It may be headed back into recession. On Friday, the government slashed its originally tally of gross domestic product, and said the economy advanced at an annual rate of just 0.4 percent in the spring quarter. The revisions also showed the recession was deeper than originally reported.

A string of fresh economic data point to continued slowing in the third quarter. On Friday, investors will find out how badly the debt statement hurt the job market in July. Job growth slowed sharply in May and June.

"It's really been since mid-February that you've seen the economic data break down," said Jonathan Golub, chief equity strategist at UBS Investment Bank. "The employment data is probably the most important in the way of looking at that. If you don't have the employment picture improved, then, in fact, we don't have a real recovery here.

Current estimates see job growth of about 85,000 for the month, not enough to keep up with the expansion of the work force, much less put a dent in the 9.2 percent unemployment rate.

Eurozone jitters
The political chaos on Capitol Hill briefly diverted investors' focus from the ongoing debt crisis in Europe. On Wednesday, rising interest rates on Spanish and Italian bonds commanded their attention again.

The surge in those bond yields to 14-year highs prompted European Commission President Jose Manuel Barroso to call on member states to speed up approval of crisis-fighting measures agreed at a July 21 summit meant to stop contagion from Greece, Ireland and Portugal to larger European economies. But neither he nor European Monetary Affairs Commissioner Olli Rehn offered any immediate steps to stem the crisis.

"Tensions in bond markets reflect a growing concern among investors about the systemic capacity of the Euro area to respond to the evolving crisis," Barroso said in a statement.

Though most European banks recently passed a financial "stress test," there's skepticism that they are prepared to cope with widespread government bond defaults. Even if they're able to withstand the losses, those defaults would be a heavy blow to Europe's economy

"It seems increasingly likely that Italy and/or Spain may eventually restructure their debts, with disastrous consequences for the euro-zone economy," Capital Economics economist Ben May said Wednesday.

Corporate profits
A further slowdown, or outright recession, in Europe would also take big bite out of U.S. corporate profits, which have held up well despite the weak U.S. recovery. Earnings have been strongest among large, global companies that do business in overseas markets showing stronger growth, especially so-called emerging markets.

There are signs that the global economy is also slowing, which would reduce demand for American products.

Some companies are already bracing for a slowdown in profits. On Wednesday, employment consultants Challenger, Gray & Christmas reported that the number of planned layoffs at U.S. firms rose to a 16-month high in July. Sectors which had been seeing fairly few layoffs unexpectedly bled jobs. Employers announced 66,000 planned job cuts last month, up 60 percent in June.

"We're seeing the visible signs of the stalling economy in the downsizing action by companies," said the firm's president, John Challenger. "What was concerning about this report is that some big cuts were made by iconic companies in a wide variety of industries."

Job cuts at Merck & Co., Borders, Cisco Systems, Lockheed Martin and Boston Scientific accounted for 57 percent of the July total, according to the report.

Consumer pullback
A weak job market and stagnant wages have also forced American households to cut back, further weakening demand for products and services. Separate surveys have shown fading consumer confidence in the economic outlook.

The belt-tightening is part of an ongoing retrenchment of the borrowing binge of the last decade.

With the unemployment rate stuck above 9 percent, consumers are spending less and saving more, according to data released on Tuesday from the Commerce Department. Consumer spending, which accounts for about 70 percent of U.S. economic activity, dropped 0.2 percent in June, the first decline since September 2009.

"That's a pretty weak sign," said Roger Altman, an investment banker and former Treasury official. "It fell because the debt-to-income ratio at the household level has only repaired about 50 percent of the distance it needs to go to get to historically normal levels. It's quite elevated."

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