Jin Lee/AP

Washington’s debilitating squabble over the nation’s debt ceiling may have ended, but the damage done to investor confidence helped drive stocks down more than 10% from their recent April peak, and to a conventional definition of a correction. The kicker: Late Friday Standard & Poor’s downgraded the U.S. credit rating to double-A plus from the triple-A rating it had for 70 years.

Capitol Hill and the White House had some help in undermining confidence from Europe, where bond yields in Italy and Spain climbed to decade highs as investors fled the government debt of those countries for the perceived safe harbors of gold, Swiss francs, and the Canadian and Australian dollars.

Stateside, lawmakers clinched a last-minute deal to raise our $14.3 trillion debt ceiling so Uncle Sam can keep borrowing enough to pay his bills and avoid a default. But while the $2.4 trillion in spending cuts proposed by Congress are heavily back-end-loaded—most won’t kick in until after 2017—that noisy show of government belt-tightening is unnerving a market still heavily reliant on government benevolence.

It didn’t help that economic momentum seems to be slowing. Last week’s ISM nonmanufacturing survey showed the service sector, which drives three-quarters of our economy, decelerating in July. Particularly alarming was the decline in export orders to a reading of 49 in July from 57 in June, which reinforced fears that the global economy is stalling as China tightens credit and Europe cuts spending.

Then on Friday, there was some good news. U.S. nonfarm payrolls data showed a gain of 117,000 jobs, better than expected, while the unemployment rate dipped to 9.1% last month from 9.2% in June, the Labor Department reported.

Still, the specter of slowing global growth drove investors toward Treasuries, despite the threat of a credit-rating downgrade sometime during the next few months. The yield on 10-year U.S. notes last week fell below 2.5% at one point Thursday, and is down sharply from 3.74% as recently as February. The Standard & Poor’s 500 dividend yield, at 2.13%, is the closest it’s been to the Treasury rate in quite a while.

The Dow Jones Industrial Average ended last week down almost 700 points, or 5.8%, to 11,444.61. The S&P 500 had its third loss in four weeks and fell 93 points to 1199.38. It marked the worst weekly loss in almost three years for the benchmark, which has pulled back 12% from its late-April peak. The Nasdaq Composite Index fell 8% to 2532.

At one point last week, the Dow had fallen for eight straight days before its rout was interrupted, briefly and barely, by a shallow 0.3% rebound Wednesday. Stocks are oversold and due for at least a technical bounce. But the selling momentum—last week’s trading volume was among this year’s heaviest—also means rallies might draw more sellers.

Ironically, the masses railing against government spending also can’t seem to wean themselves off it, and hopes quickly emerged that the closer the S&P 500 falls toward 1100, the more likely our central bank is to rescue the market with a third round of quantitative easing, or QE3.

Don Rissmiller, Strategas Research Partners’ chief economist, examined the four segments that could lead our flailing economic cycle. Households propelled our economy for decades, but without appreciating real estate or easy credit their swagger is now limited. “Businesses can certainly drive the business cycle, but it seems hard to ask a profit-maximizing corporation to leverage up just as the cycle is slowing down,” he writes. Foreign demand might goose U.S. growth, but exports alone can’t carry us unless the U.S. dollar falls significantly lower. That leaves the government, which he thinks can make “the biggest difference.”

Last week, Strategas raised the odds of a recession in 2012 to 35% from 20%, and in 2013 to 60% from 50%. Rissmiller argues we need “pro-growth fiscal policy,” and “not just the removal of anti-growth issues” like the debt ceiling. Forceful government support dragged our economy out of recession in 2009, but growth slowed to 1.3% last quarter, jobs are still scarce, and the government is running out of tricks. And as the debt-ceiling fiasco reminded us, relying on our government can be an uncomfortable proposition (Source: Barrons Online).