Economic worries and concern about an automaker bailout hammered equity markets on Wednesday, sending the S&P 500 to its lowest since 2003.

The bulk of the selloff came after the Federal Reserve released pessimistic growth forecasts and expressed worry about deflation in the minutes from the most recent FOMC meeting. The American public and elected officials also appear to be souring on the idea of an automotive bailout after two days of government hearings.

"It appears there's a higher risk the bailout doesn't go through," said T.J. Marta, fixed income strategist at RBC Capital Markets.

The S&P 500 closed at its lowest since March 2003. It declined 52.54 points, or 6.12%, to 806.58. The previous intraday low was 819.69 on Nov. 13.

In the FOMC minutes, the Fed said real GDP is expected to come in between flat and 0.3% for 2008. In the following year, the Fed's prediction ranges from -0.2% to +1.1%. In the June forecast, the Fed was expecting 2009 growth to come in between 2.0% and 2.9%. The Fed's also believes the unemployment rate will rise to between 7.1% and 7.6%.

Other stock exchanges also fell to long-term lows. The Nasdaq fell 96.85 points, or 6.53%, to 1386.42. The Dow Jones industrial average held above the intraday low of 7882 but closed below 8000 for the first time since 2003. The DJIA closed down 427 points, or 5.07%, to 7997.28.

In Canada, the TSX Composite Index held above its recent intraday and closing levels but still declined substantially as banking shares tumbled. It closed down 345 points, or 3.9%, to 8490.56.

Also weighing on stocks is the concern that the rapid slowdown in the worldwide economy and collapse of housing and commodity prices will lead to deflation.

The FOMC minutes added to those fears, saying some members believe aggressive easing on the target rate "should reduce the odds of a deflationary outcome."

Levente Mady, bond strategist at MF Global Canada, said deflation is the "flavour of the moment" in markets.

"With the commodity bubble bursting, certainly you can make the argument that further price declines are coming. Demand looks soft as well."

In a report earlier Wednesday, the month-over-month core reading on the U.S. consumer price index was the lowest since 1981.

By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2008