The stock market buckled Monday under the weight of a crisis in Europe and danger of recession at home. Reeling from a downgrade of American debt, the Dow Jones industrials plunged 634 points.
It was the worst day for the market since the financial crisis in the fall of 2008 and extended Wall Street's sudden, sharp decline. Stocks have lost 15 percent of their value in just two and a half weeks.
Monday was the first trading day since Standard and Poor's downgraded the United States' risk-free credit rating, and the selling started at the opening bell. The Dow dropped 250 points in minutes. For the rest of the day, investors looked for safer places for their money. With few buyers left for stocks, the market could only drift lower.
The Dow finished the day down 5.5 percent. The point decline was the worst since Dec. 1, 2008, and the sixth-steepest ever. The average ended at 10,809.85, its first close under 11,000 since November.
In a bit of irony following the S&P downgrade, investors decided U.S. debt was one of the safest places to be. They also sought refuge in gold, which set a record price.
"The S&P downgrade of U.S. government debt is the least of our problems," said economist Scott Brown at Raymond James & Associates. "The bigger worry is subpar economic growth and the threat of a new recession."
So anxious are many investors that they poured money into Treasury securities, the debt the government sells to finance its operations. Even though the ratings agency Standard & Poor’s downgraded United States debt a notch from the sterling AAA rating on Friday, judging them a slightly higher risk than before, many still deem Treasuries to be safer than just about any other investment.
Typically, a downgrade would cause investors to sell, but financial turmoil in Europe and policy gridlock in Washington overrode concerns about the downgrade. “This is investors running from risk wherever they see it,” said David Kelly, chief market strategist at JPMorgan Funds. “The biggest risk we face here is recession.”
The stock sell-off picked up speed even though President Obama sought to calm markets, telling reporters that “our problems are eminently solvable and we know what we need to do to solve them.” However, there is sharp disagreement how to solve them, as demonstrated by the fiercely partisan battle over raising the federal government’s borrowing limit, which was resolved only through a last-minute compromise.
In the wake of the financial collapse more than two years ago, the government took various steps to invigorate the economy, pouring money into the financial system and adopting stimulus spending. Some economists say they think more stimulus spending is needed now to keep the economy from slowing further, but this seems unlikely given that many Republicans say the country can ill afford to add to the gaping budget deficit with more spending.
It was not just the stock market that was rattled. A few obscure but important parts of the credit market also showed signs of some stress. For example, the market for commercial paper, short-term loans that companies use to finance themselves, became less favorable. This was not nearly as bad as during the financial crisis but people will be keeping an eye on this to see if conditions deteriorate.
“The cause of all this was the marking down of growth expectations,” said Barry Knapp, strategist at Barclays Capital. “It has morphed into one giant global growth recession concern.”
The trading day opened ominously in the United States, after sharp drops of stocks in Asia and in Europe. The European Central Bank sought to calm investors by intervening aggressively in bond markets with special measures to help support financially troubled Spain and Italy, to little avail.
On the floor of the New York Stock Exchange, Doreen Mogavero, a trader for Mogavero, Lee & Company, noted that other traders had canceled vacations in anticipation of a wild day. Extra staff was on duty to make sure the computer systems were working properly as volumes surged.
The exchange processed a record 390 million orders in the first hour of trading, eclipsing the last record in May 2010. All told, 18 billion shares trades on the nation’s stock market, the most active day in a year.
Many investors — burned by the relentless decline of stocks in the months after the 2008 financial collapse — seem inclined to sell rather than wait. “It is the psychological impact that I am concerned about in terms of confidence on the market,” said Ms. Mogavero.
The force of the stock market sell-off that has accelerated over the last two weeks — the broader S.& P. 500-stock index has lost 16.8 percent since July 22 — is creating the growing sense that the economy may be nearing a double-dip recession as everyone from consumers to businesses retrench.
The biggest declines were in bank stocks. Bank of America fell 20 percent. Citigroup fell 16 percent. Morgan Stanley dropped 14 percent. JPMorgan fell 9 percent. And Goldman Sachs fell 6 percent.
The French stock market as well as the German market are officially in bear market territory. The German index, the Dax, which dropped 5 percent Monday, has lost 21 percent of its value since the recent peak on May 2. That reflects investor fears that the European Central Bank’s extraordinary bond buying could entangle even Germany in the euro zone’s debt problems.
In the United States, the selling came from both panicked individuals and institutions.
Hank Smith, chief investment officer at Haverford Investments of Pennsylvania, which serves private and institutional investors, said he was fielding calls from clients who “are anxious about is this a replay of 2008-2009 and do I have to go through that again?” he said. “But we say the fundamentals are very different. Corporate America has fortresslike balance sheets.”
All 500 stocks in the S.& P. 500 index were lower by the end of the day. The index closed down 79.92 points, or 6.66 percent, at 1,119.46.
The Dow Jones closed below 11,000 for the first time this year, falling 634.76 points, or 5.55 percent, to 10,809.85.
As investors fled the stock market, and commodities like oil dropped on fears of a slowdown, they sought the safety of gold, which rose past $1,710 an ounce.
But perhaps the most surprising beneficiary was United States Treasuries, where, despite the downgrade of government debt, 10-year yields fell to 2.32 percent, from 2.56 percent, and the yield on the two-year Treasury note was at a record low.
President Obama said the markets continued to believe the United States credit rating was AAA.
Warren E. Buffett, perhaps the nation’s most famous private investor, also said he thought the downgrade was unwarranted.
“If there were a quadruple A, I would give it to the U.S.,” he said in an interview. “We will always pay the bonds — the only way we won’t pay is if the printing press strips a gear.