Stocks tumbled Monday, extending the worst slump since the bull market began in 2009, amid concern that a downgrade of the U.S. government’s credit rating by Standard & Poor’s may worsen an economic slowdown.
The Dow Jones industrial average was down 341.71, or 2.99%, at 11,102.90 shortly after 12:30 p.m. EDT, while the S&P 500 was down 46.82, or 3.86%, at 1,153.09.
Equities extended losses as S&P also lowered credit ratings on Fannie Mae, Freddie Mac and other lenders with a “direct reliance on the U.S. government.”
U.S. government bonds, benchmarks for the $34 trillion U.S. debt market that is more than twice the value of American equities, rallied. The 10-year Treasury yield fell nine basis points to 2.48%.
Gold rose above $1,700 an ounce, while the S&P GSCI index of 24 commodities dropped 1.8% as oil sank 2.6%.
“There’s no reason to get in front of this train,” Keith Wirtz, chief investment officer at Fifth Third Asset Management, which oversees $16.7 billion, 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 as manufacturing and consumer spending data showed the world’s largest economy is slowing. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of using options as insurance against declines in the S&P 500, soared 19% to 38.07, the highest since May 2010, on a closing basis.
Group of Seven and Group of 20 leaders said they are ready to stabilize financial markets after S&P lowered the U.S. rating by one level to AA+. Policymakers held emergency conference calls over the weekend to try to stave off a collapse in investor confidence that has already wiped out about $5.4 trillion in global equity values since July 26. The ECB bought Italian and Spanish government bonds, according to five people with knowledge of the transactions.
Equity markets tumbled from Tokyo to Frankfurt, with benchmark gauges in China, Taiwan, South Korea, Singapore, Austria, Greece, Norway, Turkey and the Czech Republic retreating more than 3%. The Euro STOXX 50 closed down 88.24, or 3.72%, at 2,286.91.
The downgrade of the U.S., the first time the country lost its AAA status at S&P, leaves its debt rated two steps higher than Japan and China. Moody’s Investors Service and Fitch Ratings last week affirmed their AAA U.S. ratings.
The U.S. Treasury Department said there is “no justifiable rationale” for S&P’s move. Officials from the ratings company stood by their decision and laid blame on a political system that failed to adequately address deficit reduction in the compromise law that President Barack Obama signed Aug. 2 to avert a default.