A scary drop in stocks and commodities threatens to squeeze life out of an already faltering U.S. economy, with deal-making, investment in plants and equipment, and capital raising at risk of slowing down or freezing up.
This will likely further damage consumer confidence, already jarred by the toxic battle in Congress over the government's debt ceiling and by high unemployment, and feed fears another recession is just around the corner.
Such market declines can create a vicious circle, where falling values in retirement and mutual funds hurt investors' confidence and reduces their spending activity - in turn feeding into decisions by businesses to delay or cancel plans as the outlook for sales and profits dims.
On Thursday, Wall Street suffered its worst sell-off since early 2009 when the financial crisis was still taking a big toll, while crude oil declined as much as 6 percent. The S&P 500 has now declined 10.7 percent in the past 10 trading days.
Behind the panicky slide are fears the United States is staring at another recession following a series of ugly economic figures in the past week, and concerns Europe's sovereign debt crisis is worsening as it spreads to Italy and threatens the existence of the euro zone in its current form.
Investor sentiment has also been hammered by a lack of clear political leadership in both Europe and in Washington, and concern that governments and central banks are running out of fiscal and monetary ammunition to deal with the crises.
As a result there has been a rush to the relative safety of cash, leading to the possibility of an increasing paralysis in spending decisions throughout the economy.
"The market is taking everything down, and that's causing people to pause, which will affect all businesses," said Kent Gasaway, a portfolio manager with the Buffalo Funds in Kansas City.
Here are some of the areas of the economy that are likely to suffer the biggest initial stresses from the slide in markets.
CONSUMERS
U.S. consumer sentiment had already fallen in July to its lowest in more than two years on deepening concerns about stagnant wages and rising unemployment, and could now deteriorate further.
The Thomson Reuters/University of Michigan's final reading on the overall index of consumer sentiment, released last Friday, came in at 63.7, down from 71.5 in June and the lowest reading since March 2009.
"It is possible that this will push it down even further," said Richard Curtin, director of the Thomson Reuters/University of Michigan surveys of consumers.
He said that people look at the stock market as an indicator of how the economy will perform in the future.
"If you don't have stock and you think the stock market is a predictor of the future economy, you'll tend to pull back in spending and prepare for a worse economy."
There would also be a direct, though lesser impact, from those who spend less because their stock market investments in pension and other funds have declined, Curtin said.
"I think most consumers think now that the government can't do very much either in monetary or fiscal policy. They would rather have the government be more activist and avoid a potential downturn."
Billionaire investor Wilbur Ross noted that in the financial crisis and its aftermath "consumers' balance sheets have lost around $7 trillion of net worth, trillion with a big "T" - that's a lot."
"We never had the consumer bashed this badly as happened during this past recession," he told Reuters Insider on Thursday.
BUSINESS SPENDING
Capital investment had been one of the few relatively bright spots in the U.S. economy, rising 21 percent in the first quarter and keeping up a similar pace in the second quarter, according to a Reuters study of more than 3,000 companies.
But declining business and consumer confidence, exacerbated by the stock market plunge, could lead to a pullback. Many companies are also likely to continue to invest more in fast growing markets like China in preference to the U.S. under those circumstances.
"It's awfully hard to make long-term spending decisions in an environment that's as uncertain as this one, and I believe executives will be very circumspect about their long-term spending plans as they become more focused on defensive measures and keep their powder dry," said David Joy, chief market strategist at Ameriprise Financial, where he helps oversee $571 billion in assets under management.
A number of industrial companies, including Emerson Electric Co and 3M Co, have announced plans to either curb spending or have shifted priorities to foreign markets.
Emerson's CEO David Farr is already looking for ways to limit the St. Louis-based company's spending. Rather than planning to boost its budget by 5 percent next year, Farr now aims to increase outlays by just 3 to 4 percent.
"People are still very reluctant to make long-term commitments to R&D and capital because of the uncertainty," he told reporters at an industry conference on Wednesday.
MERGERS & ACQUISITIONS
With stocks plummeting and credit markets getting roiled, bankers say dealmaking is feeling the chill.
Falling share prices could put even agreed deals in danger of unraveling, especially when stock is a big portion of the consideration.
"The debt ceiling crisis has created uncertainty in the credit markets and to a large degree the M&A market is moored to the credit markets," said Eric Greenberg, an M&A partner at law firm Paul Hastings. "You are seeing some new uncertainty at least for the short-term."
Some deals may get renegotiated if they are in danger of collapsing.
Healthcare IT provider Emdeon Inc's talks to sell itself for $3 billion to private equity giant Blackstone Group went cold last week because of difficulty in raising funds for the buyout, a source familiar with the situation said. The two sides, however, managed to strike a deal on Thursday after re-pricing the debt, the source said.
U.S.-based payment processor Fidelity National Information Services dropped plans to buy British software company Misys on Thursday and said it would instead buy back shares.
The reasons for talks falling apart are not clear, but Misys said it rejected the deal, which would have valued it around $2.4 billion, because it undervalued the company.
But so far dealmakers say most agreed deals appear to be holding up. More than 36 percent of U.S. deals so far this year have been all cash and only 9.1 percent are leveraged buyouts, according to Thomson Reuters data.
Strategic buyers who are using cash on their balance sheet to buy rivals rather than raising debt are less likely to pull out of a deal. Contracts have also become tighter, making it more difficult for companies to pull out.
And Greenberg said he is still optimistic that top-notch deals will still get done.
INITIAL PUBLIC OFFERINGS
The strains have already started to show in equity capital raising.
Employee benefits management company WageWorks Inc delayed its initial public offering after the heavy stock market losses on Thursday, according to a person familiar with the offering.
The IPO was scheduled for Friday, but it is now expected early next week, the person added.
Shares of specialty finance company American Capital Mortgage Investment Corp, which was raising money to invest in mortgage securities and began trading on Thursday, fell almost 8 percent in their debut after the company cut the deal size by more than half.
"We're in a corrective action that will dampen IPOs, which will stall the market, but I think people are reading into this more significance than exists," said Kenneth Fisher, a billionaire investor who oversees $41 billion at Woodside, California-based Fisher Investments Inc.
Still, even big U.S. government-backed companies have struggled to get to market.
Ally Financial, which is planning a $6 billion initial public offering and was hoping at one point to launch the offering in June, then considered the late summer, is now not expected to come to the market before September, sources said.
During the financial crisis the U.S. Treasury poured $17.2 billion into the ailing auto and mortgage lender.
A secondary offering of General Motors Co shares by the U.S. Treasury also looks likely to be later than originally anticipated.
"I wouldn't be looking to put out, frankly, much of anything unless I had a gun to my head and I had to," said one banker who spoke on condition of anonymity.
"If you're going to market right now you need money because this is not a great market," that banker added. "Multiples and valuations are bad. Until the market improves or at least stabilizes and the prospects look healthier, I think the capital markets will continue to be anemic."
PENSION FUNDS
The stock market decline has taken the shine off bumper recent returns by some state pension funds, many of which face long-term funding shortfalls that ultimately would be state government responsibilities.
Calpers, the nation's largest public pension fund, gained 20.7 percent to $237.5 billion in the fiscal year to June 30. But even that did not return it to its October 2007 peak of $260 billion, and the fund dropped to $233 billion on Wednesday, before Thursday's slide was factored in.
"We have a long-term strategy and we stick to it," said Wayne Davis, a spokesman for the California Public Employees' Retirement System fund, adding that managers had improved risk management since the 2008-2009 financial crisis.
Assets covered only about 60 percent of liabilities at the end of June, and critics say Calpers is too optimistic with a target of 7.75 percent for annual returns. Chief Investment Officer Joe Dear points to an average net return on investments of 8.4 percent over 20 years.
New Jersey's pension fund managed to gain 18 percent in the fiscal year to June 30 by swapping from bonds into now-swooning equities.
"Right around nine months ago, we heavily got out of Treasuries," said Andrew Pratt, spokesman for New Jersey Treasurer Andrew Sidamon-Eristoff. "That contributed a lot to our gains."
What worries some strategists most though, is that ultra-low yields on bonds could really start to hurt state pension funds and eventually state budgets.
This will be more damaging than any short-term hit from declining stock prices, said Michael Pietronico, chief investment officer at Miller Tabak Asset Management in New York.
"When long bonds go toward a 3.70 percent yield this is more problematic for pensions than many may think at the moment," he said.
BANKS
Banks have seen their deposits spike in recent days as investors flee into cash from stocks and other higher-risk investments. Increasing deposits would normally be positive as it would provide banks with a cheap source of funding but in the current circumstances has become a problem for some.
It is likely to weaken their capital levels by boosting their liabilities -- and that comes at a time when banks have been struggling to rebuild capital levels that were depleted by the financial crisis and to meet new regulatory standards.
On Thursday, Bank of New York Mellon, citing an overwhelming influx of cash deposits from large clients in reaction to world economic events, said on Thursday it will begin passing along some insurance fees on selected accounts that exceed a depositor's prior monthly average.
The bank, one of the largest custodial banks in the world, said it would impose a fee on above-average deposits made by institutional customers, because the deposits could weaken its capital position and raise its deposit insurance premiums.
Others banks could be forced to impose similar fees, as falling long-term interest rates are reducing the income banks receive on loans that they make. The rates that banks pay depositors are already near zero and can hardly go any lower.
Some customers are going elsewhere to avoid the bank fees.
"This is driving people out of the banking system and into money market accounts," said Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts-based firm that tracks the $2.6 trillion money-market mutual fund industry.
