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Dow plummets 634 points amid downgrade backlash
NEW YORK - Stocks plunged Monday as anxiety overtook investors on the first trading day since Standard & Poor's downgraded American debt.
The Dow Jones industrials fell 634.76 points. It was the sixth worst point decline for the Dow in the last 112 years and the worst one-day drop since December 2008. Every stock in the Standard & Poor's 500 index declined Monday.
Investors worried about the slowing U.S. economy, escalating debt problems threatening Europe and the prospect that fear in the markets would reinforce itself, as it did during the financial crisis in the fall of 2008.
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"`What's rocking the market is a growth scare," said Kathleen Gaffney, co-manager of the $20 billion Loomis Sayles bond fund. "The market is under a lot of stress that really has little to do with the downgrade." Instead, Gaffney said, investors are focused on "how Europe and the U.S. are going to work their way out of a high debt burden" if economic growth remains slow.
Investors desperately looked for safe places to put their money and settled on U.S. government debt — even though it was the target of the downgrade Friday, when S&P removed the United States from its list of the lowest-risk countries.
The price of Treasurys rose sharply, and yields, which move in the opposite direction from price, fell. The yield on the 10-year Treasury note fell to 2.34 percent from 2.57 percent Friday. That matches its low for the year, reached last week.
"This is largely a flight to safety," said Thomas Simons, money market economist with Jefferies & Co. "The bond market is really trading off of what's going on in the stock market." Money flowed out of stocks and into Treasurys.
Gold set a record. It rose $61.40 to settle at $1,713.20.
Crude oil, natural gas and other commodities fell sharply on worries that a weaker global economy will mean less demand. Oil fell 6.4 percent to settle at $81.31 per barrel.
Fear is spreading quickly through the market, said Dimitre Genov, senior portfolio manager with Artio Global Investors. "It's becoming a vicious cycle and could feed into consumers reducing their demand as well."
Roben Farzad, a senior writer for Bloomberg Businessweek, said on "The Early Show" that investors should approach recent financial events by considering their long-term approach before panicking and pulling out of the market.
"Truth be told, if they need that money to keep the lights on, to pay the rent, they shouldn't be in the market, but if they are in this for the long haul ... then they should just stick to their plan," Farzad said. "We saw the last time a panic like this was felt in the spring of 2009, which was a generational low for stocks, a lot of people sold out and were kicking themselves a year later."
The Dow was down 5.5 percent at 10,809.85. The sharp drop extended Wall Street's almost uninterrupted decline since late July, when the Dow was flirting with 13,000. It fell below 11,000 for the first time since November.
The S&P 500 fell 79.92, or 6.7 percent, to 1,119.49. The Nasdaq composite index fell 174.72, or 6.9 percent, to 2,357.69.
Stock markets in Asia began Monday's global rout. The main stock index fell almost 4 percent in South Korea and more than 2 percent in Japan. European markets opened later and fell, too, with Germany down 5 percent and France 4.7 percent.
In the U.S., stocks fell even as Moody's, another major credit rating agency, stood by its top rating of Aaa for the United States. It said it could downgrade the U.S. if it doesn't cut its deficit, "but it is early to conclude that such measures will not be forthcoming."
Financial markets also did not appear comforted by an afternoon statement by President Barack Obama, who said Washington needs more "common sense and compromise" to tame its debt.
Watch: Obama says U.S. will always be AAA country
"Markets will rise and fall," he said. "But this is the United States of America. No matter what some agency may say, we've always been and always will be a triple-A country."
S&P, in its downgrade, criticized dysfunction in the American political system. The downgrade wasn't a total surprise but came when investors were already feeling nervous about the U.S. economy and European debt, among other problems.
Last week, the Dow Jones industrial average fell almost 700 points. That was its biggest weekly point loss since October 2008, during the financial crisis. Counting Monday, the Dow has dropped in 10 of the last 12 trading days. It is down more than 1,900 points, or 15 percent, since July 21.
The Russell 2000 index of small stocks has now lost nearly 25 percent from its most recent high on April 29. A decline of 10 percent or more off recent highs is considered to be a correction. But a drop of 20 percent or more is said to be the start of a bear market.
The Nasdaq and S&P 500 are both down about 18 percent since the end of April. The Dow is down 16 percent.
The last bear market for the S&P 500 ran from October 2007 until March 2009. The index lost 57 percent of its value during the downturn.
S&P on Monday downgraded mortgage lenders Fannie Mae, Freddie Mac and other agencies linked to long-term U.S. debt. Fannie and Freddie own or guarantee about half of all U.S. mortgages. Their downgrade could eventually mean higher mortgage rates.
Worries about weaker profits that could result from a slowing economy have slammed the financial industry since late July. As a group, financial stocks in the S&P 500 index fell 10 percent on Monday to their lowest level since July 2009.
Bank of America plunged 20.3 percent, to $6.51, after AIG filed suit against the bank. The insurer alleged Bank of America sold it overvalued mortgage-backed securities. The bank denied the allegations. Its stock is down 51 percent this year, from $13.34.
Stocks in other industries whose profits are closely tied to the strength of the economy also fell sharply. Energy stocks in the S&P 500 fell 8.3 percent, for example.
The smallest losses came in safer industries such as consumer staples whose profits tend to be steadier, regardless of the economy. Even in a bad economy people will still buy things like toothpaste and bread.
The Vix index, a measure of fear among investors, shot up 47 percent to its highest level since May 2010. The index shows how worried investors are that the S&P 500 will drop over the next 30 days. It does this by measuring prices for stock options that investors can buy to help protect their portfolios.
Investors are also worried that Italy or Spain could become the next European countries to have trouble repaying its debts. Greece, Ireland and Portugal have already received bailout loans because of Europe's 21-month-old debt crisis.
The fears have pushed investors to shun Spanish and Italian bonds, which led to higher yields on the bonds. That resulted in even higher borrowing costs for the countries.
The European Central Bank stepped in Monday and bought bullions of euros worth of their bonds. The move helped to lower yields on Spanish and Italian bonds, at least temporarily.
Seeking to avert panic spreading across financial markets, the finance ministers and central bankers of the Group of 20 industrial and developing nations issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.
"We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets," they said.
Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected.
The economy grew at a 1.3 percent annual rate from April through June, below economists' expectations. It expanded at just a 0.4 percent rate in the first quarter. The first half of 2011 was the slowest since the end of the recession.
Then reports showed that the manufacturing and services industries barely grew in July. Job growth was better than economists expected last month. But the 117,000 jobs created in July were still well below the 215,000 that employers added in February, March and April, on average.
The Federal Reserve will meet on Tuesday, but economists don't expect much to come out of the meeting. The central bank's key interest rate is already at a record of nearly zero, where it has been since 2008.
The Fed has also already said that it plans to keep rates low for "an extended period." Chairman Ben Bernanke said last month that the Fed could step in to help the economy if it further weakened.
Fears about a weaker U.S. economy have overshadowed the profit growth that companies have reported for the second quarter. For the 441 companies in the S&P 500 that have already reported, earnings rose 12 percent in the second quarter from a year earlier. Revenue growth has also topped 10 percent for the first time in a year.
Verizon Communications Inc. fell 3.9 percent after it was unable to come to terms with 45,000 workers on health care costs, pensions and other issues.
More than 69 stocks fell for every one that rose on the New York Stock Exchange. Consolidated trading volume was heavy at 9.7 billion shares, nearly triple the volume in early July.
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The politicians and citizens are so GREEDY that the wrath of God will be on ALL OF THEM except me. I am of the family of God, not the GREEDY of the U.S.
It will not be until we all unite in the Class War and demand the rich pay their fair share that we will have any chance of winning. The giant corporations and the greedy evil rich who run them and have seized the government LOVE this partisan bickering.
Big O's speech was the cause of the fall...
As soon as many more of us acknowledge the depth and scope of this evil corruption, the sooner we can do something about it.
They are determined to have giant corporations dominate everything and everyone. They could not care less who they hurt or kill. It really is that simple.
Blame game again!!7 out of the 10 richest politicians in DC are Democrats - they didn't get that way on a senator's or congressman's salary. Dems had the majority from 2008 in both houses till Jan 2011 and the WH since 2009 - Obama doesn't know his azz from a hole in the ground when it comes to overseeing this country. All of you dem lovers have been pimped by the best - start thinking for yourselves instead of repeating from the dem playbook 2011. Tea party candidates didn't take office till Jan 2011 - they were sent to DC to stop the out of control spending - do you have a problem with that? Obama and the dems had over 2 years to close the tax loopholes they scream about - did they, no, why, because their bed buddies like GE would have had to pay taxes on 14.5 billion in profits. Like I said, you're being pimped by the rich dems and either too dumb or too stupid to figure it out.
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F4 you are far too caught up in the whole blame game. Without any lectures it is time for everyone to accept the reality that there is more than enough blame for everyone. We have created a dysfunctional government that is polarized and it on its rapidly on its way to becoming paralyzed. THAT IS THE CAUSE OF THE DOWNGRADE.
What did you expect to happen? When we refused to look at our fianancial situation realistically it led to the lowering of our bond rating. In case you haven't noticed it is going to cost us all a heck of a lot more in interest rates than any tax increase that would have passed before this manufactured crisis. Also, we do not have any hope of regaining the AAA rating back if we are unwilling to not just accept new taxes but also muzzle the hate that is coming out of Washington.
We have a choice, we can become a 3rd world power used-to-be or we can step up to the challenge. The hate that has been projected at this presidency in unpresedented in modern history and has to stop. If unable to respect the man - then respect the office.
The result of the fragmented government created by the TEA Party and the pursuit of removing revenue from the government is directly responsible for this mess.
...Can you provide a valid quote from the S & P that says "Republican intransigence on new revenue and brinkmanship on the debt ceiling as the cause for the downgrade."
Because that's NOT what they said, at all.
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Hi George,
This is from the Anderson Cooper interview on August 5, 2011 of John Chambers of S&P:
"The political brinkmanship of recent months highlights what we see as America's governance and policy-making becoming less stable," this is S&P, "less effective and less predictable than what we previously believed." - John Chambers of Standard & Poor's
Quoting again, "We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act." - John Chambers of Standard & Poor's
Sounds like your having a bad day. The core of the issue really has to do with the intractability on revenue and the TEA Party's disruptive nature. The banking industry does not want to guess if we will fail, are even be late, on paying our debts.
Vote for anyone that wants a smaller government, less government control, less government spending, government abolishment of all subsidies and also all foreign aid, abolishment of the Federal Department of Education, strict illegal immigrant control, better and more efficient legalizing immigrant processes, less Military involvement in foreign "crisis" episodes, more tax reform but not tax hikes (flat or fair tax), more true entitlement regulation with less ripoffs from administrators, and any other costs savings from un-need programs and programs that rip off the taxpayers.
Common sense people know what the U.S. needs to get out of this crap. It isn't rocket science.
Wait....isn't that what we need MOST?
Do the math. Take every cent the rich have and we still be in this mess.
Look at the numbers Tea party did. The big reason we lost are rating we did not balance the budget and cut spending.
Freedom is being able to make your own path without a permit and giving all your money to the goverment.
O-butt-head sounds nice ,but the math will not work.