Dow tumbles 634 points on recession fears

Accelerating fears of a new global recession sent the Dow Jones industrial average plummeting more than 600 points — wiping out $1 trillion in U.S. market value — as the White House scrambled to contain the damage.

The massive stampede out of stocks, the second plunge in three trading days, was fueled partly by reaction to the U.S. credit rating downgrade. The sell-off threatened to further sap confidence in the faltering U.S. economy, giving businesses and consumers another reason to cut back on spending.

The market debacle set the scene for a crucial Federal Reserve meeting Tuesday, with Wall Street again looking to the central bank to come to the economy’s aid. Investors were bracing for another downturn, with Asian markets falling again sharply in early trading.

The worldwide meltdown began the moment investors were able to weigh in on the historic decision by Standard & Poor’s to revoke its AAA rating of U.S. debt. The rout echoed the market chaos of the financial crisis three years ago.


“The sentiment among Main Street investors is this is going to be 2008 all over again,” said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J. “They’re thinking, ‘I may have been fooled once, but I won’t be fooled a second time and I want out’” of the stock market.

By Monday’s closing bell, the Dow had sustained its largest one-day drop — 634.76 points, or 5.6% — since fall 2008. The Dow now is down 15.6% from its April high and 6.6% for the year. The Standard & Poor’s 500 index skidded 79.92 points, or 6.7%, for the day; and the Nasdaq composite tumbled 174.72 points, or 6.9%.

The rush out of stocks began overnight in Asia and Europe and slammed full force into Wall Street. The speed and ferocity of the free fall stunned even professional investors who expected stocks to decline after the S&P downgrade.

Of the more than 3,000 stocks on the New York Stock Exchange, just 45 issues rose for the day. Trading volume was extremely heavy.


The markets were braced for turmoil after S&P late Friday cut the U.S. debt rating to AA+ from the top-rung AAA grade, citing concerns about the nation’s growing debt load and uncertainty about Congress’ willingness to rein in borrowing.

The severe losses in stocks brought a torrent of criticism of S&P in Internet forums, as some angry investors noted that the firm had helped fuel the 2008 financial crisis by underestimating the risks of securities backed by subprime mortgages.

President Obama, in a midday speech from the White House, did not directly criticize the company but said the ratings were irrelevant.

“Markets will rise and fall, but this is the United States of America,” Obama said. “And no matter what some agency may say, we’ve always been and always will be a AAA country.”

Obama also tried to reassure the world that U.S. leaders could put aside the political disputes that put the country on the brink of default before a last-minute agreement to raise the debt ceiling. “The fact is, we didn’t need a rating agency to tell us that we need a balanced long-term approach to deficit reduction,” he said.

But his words failed to halt the market’s slide. U.S. stocks lost an additional $300 billion in value after his speech ended, according to investment consultant Wilshire Associates.

S&P’s downgrade of its U.S. rating to AA+ claimed collateral damage Monday as the firm also lowered the credit rating of entities whose debt is guaranteed by the U.S., including seized housing giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks.

Despite S&P’s rating cuts, Treasury bond yields dived in Monday’s global market panic as investors rushed to buy.


In a time of extreme tumult in markets, investors still are trusting that Treasuries will offer relative safety, analysts said. “People look around the world, and they don’t know where else to go,” said Charles Comiskey, head of Treasury bond trading at Scotia Capital in New York.

The benchmark 10-year T-note yield sank to 2.34%, down from 2.56% on Friday and the lowest since early 2009. Gold, also seen as a haven, soared to a new high of $1,710 an ounce. The metal has surged 20% this year.

But prices of other commodities tumbled Monday as traders feared the economy would stall, causing demand for raw materials to slump. U.S. crude oil prices sank $5.57 to $81.31 a barrel, the lowest since November. That should push gas prices down soon.

For global markets, the last few weeks have brought the perfect storm: Doubts mushroomed about the economic recovery at the same time that Congress was engaged in a vicious partisan battle over the federal debt ceiling, further draining investor confidence.

In Europe, worries rose that Italy and Spain would follow Greece, Ireland and Portugal in needing bailouts from the European Union.

The effect of the U.S. debt downgrade was more of a psychological blow to a world fearful of another economic downturn so soon after the deep 2008-09 recession.

“It just reinforced the feelings on the part of investors that there’s … a lot of things to be worried about,” said Nigel Gault, chief U.S. economist for IHS Global Insight. “Psychology is huge for the markets, especially when you’ve got so many problems on the table right now.”

Amid the rush out of equity markets worldwide, there was some positive news from Europe, as interest rates fell on Spanish and Italian government bonds.


Rising rates on those bonds in recent weeks had threatened to make it too expensive for the countries to borrow, raising the prospect that they would be forced to seek bailouts from the rest of the euro-zone. But late Sunday the European Central Bank said it would jump into the market on Monday to buy euro-zone countries’ bonds, in an attempt to drive down rates.

The move worked, at least for a day: The market rate on 10-year Italian bonds tumbled to 5.29% from 6.09% on Friday.

But every step European policymakers have taken over the last 15 months to stabilize the euro-zone’s debt crisis has failed to provide a permanent fix, leading to ever-more-expensive bailouts.

Now, markets will focus on Federal Reserve policymakers’ meeting Tuesday. With Democrats and Republicans at a stalemate over economic policy, and Congress on break until September, it might be up to Fed Chairman Ben S. Bernanke and his central bank colleagues to try to stem the panic, said Ed Mills, an analyst with FBR Capital Markets.

“I don’t think anyone has any idea about what it would take to reverse what we have seen over the last couple of weeks, but there is a strong desire … for Washington to do something,” Mills said. “The one person left standing with any levers to pull over the next month is Ben Bernanke.”

The Fed could signal that it will keep its key short-term interest rate near zero for a specific period — perhaps years — rather than for an “extended period,” the language it has been using in its post-meeting statements. The Fed also could cut to zero the 0.25% interest rate that it currently pays banks to hold their cash, hoping that the step would push financial institutions to lend out or invest the money instead of parking it with the central bank.

But some analysts say the only option now is for major central banks to make another massive infusion of money into the financial system, buying up government bonds and perhaps other assets to try to stabilize markets.

George Goncalves, interest-rate analyst at Nomura Securities in New York said the Fed, European Central Bank and Bank of Japan might have to commit to injecting $3 trillion to $5 trillion to have the necessary effect.

“I think you need shock and awe,” he said. “They will not sit by and watch this thing cascade.”

Times staff writer Don Lee contributed to this report.

Get our weekly California Inc. newsletter