Stocks tumbled on Tuesday, erasing the 2011 gain for the S&P 500, after an unexpected drop in consumer spending increased concern that growth in the world’s largest economy is faltering.
The Dow Jones industrial average closed down 265.87 points, or 2.19%, to 11,866.62; the S&P 500 fell 32.89 points, or 2.56%, ending at 1,254.05; and the Nasdaq composite closed down 75.37, or 2.75%, at 2,669.24. All numbers are preliminary.
Stocks extended losses even after President Barack Obama signed legislation to raise the debt limit.
“We’re in a sluggish economy,” Mark Bronzo, a portfolio manager at Security Global Investors in Irvington, N.Y., said in a telephone interview. “Now that we’ve moved past the debt ceiling fears, people are really focused on growth. The market is very unforgiving. We’re in this period where people don’t love the stock market. They think economic growth is slow. So, there’s a flight to safety.”
The S&P 500 fell 5.6% from this year’s high on April 29 amid concern about Europe’s debt crisis and speculation that U.S. lawmakers would fail to reach a compromise to boost the nation’s ability to borrow by a deadline set for Tuesday.
Stocks fell after Commerce Department figures showed purchases slid 0.2%, after a 0.1% gain the prior month. It was the first drop in consumer spending in almost two years.
The Senate voted to ratify a U.S. debt-limit compromise that will avert a default even as it defers decisions on the nation’s finances to a bipartisan panel and may only modestly reduce deficits. The House late Monday approved the measure, which raises the national debt ceiling enough to fund the government until 2013 and threatens automatic spending cuts to enforce a goal of cutting $2.4 trillion over the next decade.
Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., said the debt ceiling compromise reached by Congress won’t make a “significant dent” in U.S. deficits. “In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at net present cost,” he wrote.
Fitch Ratings on Tuesday said the U.S. remains under a review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating. Fitch said it expects to complete the ratings review by the end of August.
While the agreement is a “step in the right direction,” the U.S. must confront “tough choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut,” Fitch said in a statement.
Both S&P and Moody’s Investors Service are still weighing whether to cut the U.S. credit rating. S&P said in July that the impasse boosted to 50% the chance that it will downgrade the U.S. from AAA within three months.