Stocks tumbled Monday, with a 600-point decline causing the Dow Jones industrial average to close below 11,000 for the first time since October, amid concern that a downgrade of the nation's credit rating by S&P may worsen an economic slowdown.
The DJIA closed down 634.76, or 5.55%, at 10,809.85; the Dow last closed below 11,000 on Oct. 19, when it ended trading at 10,978.62.
The S&P 500 fell 79.92, or 6.66 %, ending at 1,119.46.
The Nasdaq composite closed down 174.72, or 6.90 %, at 2,357.69.
All numbers are preliminary.
The S&P 500 slumped 12% in three days, the most since November 2008, and fell to the lowest since September 2010, on a closing basis. The index has fallen 17% since April 29.
The Russell 2000 slumped 6.5%, entering a bear market, down 23% from its April 29 high.
“There's no reason to get in front of this train,” Keith Wirtz, chief investment officer at Fifth Third Asset Management, said in a telephone interview. “Yes, there's cheapness in the stock market, but right now emotions are high. There's enough uncertainty out there. People are moving toward no risk. That includes Treasuries, which is ironic.”
The downgrade extended a rout that had wiped out $1.94 trillion in market value from the country's stocks amid concern the economic recovery is at risk. Global equities tumbled and European shares entered a so-called bear market. The Stoxx Europe 600 Index has now fallen 21% from this year's high on Feb. 17.
S&P lowered the U.S. long-term rating one level to AA+ after markets closed on Aug. 5, while keeping the outlook at “negative” as the company becomes less confident that Congress will end Bush-era tax cuts or tackle entitlements. S&P also said the U.S. rating may be reduced to AA within two years if spending reductions are lower than agreed to, interest rates rise, or “new fiscal pressures” result in higher general government debt.
Moody's Investors Service on Monday affirmed the U.S.' AAA rating with a negative outlook for the second time in a week. Steven Hess, senior credit officer at Moody's, said in a telephone interview that the dollar's status as the main reserve currency allows it to support higher debt levels than other countries, and lawmakers last week took a “positive step” toward addressing the nation's record deficits,.
President Barack Obama on Monday said the U.S. “always will be a AAA country” and that he will release a new proposal to deal with the federal deficit in the coming weeks. He said the main is the “lack of political will in Washington” to solve the country's problems.
The debt downgrade is “not so much because they doubt our ability to pay our debt,” but because after a month of wrangling, the rating service “doubted our political system's ability to act,” Mr. Obama said.
Equities extended losses Monday as S&P also lowered credit ratings on Fannie Mae, Freddie Mac and other lenders with a “direct reliance on the U.S. government,” spurring concern over the ripple effects of the loss of America's AAA rating.
Treasuries rose Monday, as two-year yields fell to a record low after Japanese Finance Minister Yoshihiko Noda said U.S. Treasuries were attractive. Group of Seven nations said they will take every action necessary to stabilize financial markets after the U.S. credit rating downgrade.
The Chicago Board Options Exchange Volatility Index, or VIX, soared 32% to 42.18, the highest since May 2010, on a closing basis.
Berkshire Hathaway's Class B shares slumped as much as 2.5%. Warren Buffett's company is among firms that might be downgraded by S&P as the ratings company reviews insurers after stripping the U.S. government of its AAA rating.
“Our view of these companies' fundamental credit characteristics has not changed,” S&P said in a statement Monday as it cut the outlook on Berkshire to “negative.” “Rather, the rating actions reflect the application of criteria and our view that the link between the ratings on these entities and the sovereign credit ratings on the U.S. could lead to a decline in the insurers' financial strength.”