Every stock in the Standard & Poor's 500 index also declined Monday.
But the S&P downgrade wasn't the only catalyst Monday. Investors worried about the slowing US economy, escalating debt problems threatening Europe and the prospect that fear in the markets would reinforce itself, as it did during the financial crisis in the fall of 2008.
"What's rocking the market is a growth scare," said Kathleen Gaffney, co-manager of the $20 billion Loomis Sayles bond fund. "The market is under a lot of stress that really has little to do with the S&P downgrade." Instead, Gaffney said, investors are also focused on worries about another recession and "how Europe and the US are going to work their ways out of high debt burdens" if economic growth remains slow.
The Vix, a measure of market volatility and fear among investors, shot up 50% today. That was its steepest rise since February 2007.
Investors desperately looked for safe places to put their money and ironically settled on US government debt -- even though it was the target of the downgrade last Friday, when S&P removed the United States from its list of the lowest-risk countries.
The price of Treasuries rose sharply, and yields, which move in the opposite direction from price, plunged. The yield on the 10-year Treasury note fell to 2.34% from 2.57% last Friday. That matches its low for 2011, reached last week. Before last Friday, there was widespread concern that a downgrade would push yields up and increase borrowing costs for the government, businesses and consumers.
"This is largely a flight to safety," said Thomas Simons, money market economist with Jefferies & Co. "The bond market is really trading off of what's going on in the stock market." Money flowed out of stocks and into Treasuries.
Gold set a new record. It rose $61.40 an ounce to settle at $1,713.20.
Crude oil, natural gas and other commodities fell sharply on worries that a weaker global economy will mean less demand. Oil fell 6.4% to $81.31 per barrel, its lowest price of the year.
Fear is spreading quickly through the market, claims Dimitre Genov, senior portfolio manager with Artio Global Investors. "It's becoming a vicious cycle and could feed into consumers reducing their demand as well."
The Dow was down 5.5% to 10,809.85. The sharp drop extended Wall Street's almost uninterrupted decline since late July, when the Dow was flirting with 13,000. It fell below 11,000 for the first time since November 2010.
The S&P 500 fell 79.92, or 6.7%, to 1,119.46.
The NASDAQ Composite index fell 174.72, or 6.9%, to 2,357.69.
Trading volume was the highest since September 2008 and the fourth-highest on record. A total of 9.9 billion shares traded, and about 70 stocks fell for every one that rose on the New York Stock Exchange.
Then what happened on Tuesday August 9 to US Stocks?
US stocks on Tuesday August 9 surged up the most in two years -- rebounding after August 8, their worst day since 2008 -- after a divided Federal Open Market Committee said benchmark rates would stay near zero through mid-2013.
Are stocks still a safe bet?
In a volatile session August 9, the Dow Jones Industrial Average DJIA +3.98% rallied back on Tuesday from Monday’s battering, gaining 429.92 points, or 4%, to 11,239.77. It had fallen as much as 205 points after the Fed released its Tuesday afternoon statement. The rebound recovered part of Monday’s loss (August 8) of 634.76 points, or 5.6%, the sixth-largest point loss in its history, and its worst day since December 1, 2008. All 30 of the blue-chip index components gained Tuesday, with Bank of America Corp. BAC +1.32% up almost 17%, recouping most of the prior day’s 20% drop.
The S&P 500 Index SPX +4.74% added 53.07 points on August 9, or 4.7%, to 1,172.53, with financial firms faring best of the index’s 10 industry groups after getting socked the hardest on Monday August 8.
The NASDAQ Composite Index +5.30% climbed 124.83 points on August 9, or 5.3%, to 2,482.52.
For every stock falling, nearly a dozen gained on the New York Stock Exchange on August 9, where 2.4 billion shares exchanged hands. Composite volume topped 8.9 billion.
On August 9, the Fed announced it would keep interest rates, now near 0%, at ultralow levels at least through mid-2013 — the first time it put a time frame on its low-rate stance. The monetary committee also lowered its outlook for the pace of recovery, and discussed a range of policy tools to stimulate growth. Three members of the FOMC dissented, stating they preferred to keep the “extended period” wording in talking about its benchmark interest rate.
“Today’s Fed action is at best a bunt, with the opportunity for the Fed to swing at another pitch” come the annual Jackson Hole symposium later in the month,” according to Guy LeBas, Janney Montgomery Scott’s chief fixed income strategist. “That forum is notorious for introducing new policy mechanisms and implicitly running them by the ultimate umpire, the financial markets,” he said.
Wall Street’s recent havoc is “giving investors flashbacks to the nightmare of 2008. However, unlike Freddie Krueger, 2008 isn’t back,” said Matt Freund, senior vice president of investment-portfolio management at USAA Investment Management Co. “Unlike three years ago, corporate balance sheets are healthy, liquidity is plentiful and the level of speculative investing is down dramatically,” added Freund, who attributed the current market volatility to “the ongoing situation in Europe and the potential for a slowing global economy.”
Shares of the G5 Electronics IP Vendors on August 8, 2011:
Shares of the G5 Electronics IP Vendors on Tuesday August 9, 2011:
Indeed, the entire US market went through unprecedented wild gyrations each day of the week from Monday till Friday August 9. It produced alternating days of collapsing prices — accompanied by speculation of a renewed financial crisis that could be even worse than the one that began in 2008 — and sharply rising prices the next day amid reassurances that banks are healthy and corporate profits strong.
On Thursday August 11, the Standard & Poor’s 500-stock index soared 4.6% to 1,172.64. Traders pointed to a small decline in claims for unemployment insurance in the United States and to reassurances from French officials that their country’s banks were safe. That gain recovered all of a 4.4% decline on Wednesday August 10th. For the two days, the index was up by only 0.11 point. On Monday August 8, the market had fallen by 6.7%, only to leap by 4.7% on Tuesday August 9. Never before in the history of the S.& P. index, which goes back to 1928, had there been alternating gains and losses of more than 4% on four days. In most years, there were no such days at all.