Investors from all over the world reacted to the downgrade of the U.S.’s credit rating by selling stocks and purchasing traditional safety zones like gold, currencies of Switzerland and other unencumbered countries, and – despite the downgrade – U.S. Treasury bonds.
The Dow Jones Industrial Average ended the day down 634.76 points (5.5 percent) at 10809.85 and trading volume on the New York Stock Exchange hit the fourth-highest level in history. The Standard & Poor’s 500 index slid down 79.92 points ( 6.7 percent) for the day, and the Nasdaq composite index tumbled 174.72 points ( 6.9 percent).
Selling accelerated as the day went on, showing little reaction to President Barack Obama’s televised speech in which he said the ratings downgrade should add a “renewed sense of urgency” for the political parties to made serious progress on addressing the debt and deficit.
“Markets will rise and fall, but this is the United States of America,” President Obama said. “And no matter what some agency may say, we’ve always been and always will be a AAA country.”
It was the Dow’s sixth-largest point decline ever. Other major stock indexes also fell heavily. While the S&P downgrade precipitated the selling, it intensified because of investors’ lack of confidence in the economy and in the stability of world financial markets, according to the Wall Street Journal.
“There’s probably as much uncertainty as we’ve seen since 2008,” Eric Pellicciaro of asset manager BlackRock’s Fundamental Fixed Income division, which has $612.5 billion in assets under management, told the Wall Street Journal. “There’s a general feeling that policy options are few and far between. There’s a feeling that fiscal austerity is coming at the worst possible time.”
Some investors observed key differences between the recent few days and the depths of the 2008-09 financial crisis. Fears, concerns and selling are broader in scope, intensified by the risk of another recession and of default by European borrowers.
“One of the big distinctions that we have made is that 2008 was really a financial crisis and the events of last week are really a political crisis,” John Traynor, chief investment officer for the bank’s wealth-management unit, which manages more than $3.5 billion and serves clients with between $1 million and $5 million in assets, told the Wall Street Journal.
On Monday, the stock selling affected almost every segment of the market, with all 500 stocks in the S&P 500-stock index declining, along with the 30 stocks in the Dow industrials.
Traders said the stock selling on Monday was driven in large part by hedge funds and large exchange-traded funds, especially those that use borrowed money to enhance their performance. When stocks fall suddenly, such funds are forced to sell assets to pay back some of their loans.
The Wall Street Journal – http://tinyurl.com/3nlpqro
The Los Angeles Times – http://tinyurl.com/3tjf3zu
Photo by flickr user Katrina.Tuliao, used under Creative Commons license