The historic downgrade of the United States engendered by political gridlock in Washington caused one of the worst days ever on Wall Street Monday, with the Dow Jones industrial average plummeting more than 600 points in its sixth-biggest drop.
Standard & Poor’s cut in the once-untouchable U.S. credit rating to AA+ from AAA late Friday night shook global markets and added to worries that the world’s largest economy is sinking inexorably toward a double-dip recession.
In a panicky day of tumultuous trading on Wall Street, even a pledge by President Obama to double down on efforts this fall to come up with a major debt reduction plan that would satisfy ratings agencies did nothing to console markets.
“Markets will rise and fall,” the president said at an impromptu White House appearance in midafternoon. “But this is the United States of America. No matter what some agency may say, we’ve always been and always will be a AAA country.” But the Dow, which was down about 400 points when Mr. Obama appeared, only deteriorated further and lost another 200 points.
After a day of wild swings and record-making carnage from Tokyo to New York, the Dow ended down 635 points or 5.6 percent at 10,809. The Standard & Poor’s 500 index of blue chip stocks and tech-heavy Nasdaq composite index both lost a breathtaking 6 percent of their value in one trading session.
Asian stock markets plunged further Tuesday. In Japan, the benchmark Nikkei 225 index of the Tokyo Stock Exchange fell 4.07 percent, or 370.58 points, to 8,726.98 in midmorning trading, adding to a 2.18 percent plunge on Monday. South Korean shares also shot lower, dropping more than 5 percent, with the benchmark Kospi index down at 1,775.78.
The market was merciless. Even the most optimistic investors viewed their cumulative losses of more than 15 percent since the end of last month and gave up hope, scurrying into safe havens for shelter from the storm. Oil prices plunged in tandem with stocks by 6.4 percent to $81.70 in New York, erasing gains for the year. Gold prices soared to new record highs over $1,700 an ounce.
In perhaps the greatest irony of the day, investors piled into U.S. Treasury securities targeted by the downgrade — showing they have not lost their appeal as a refuge from the storm. The yields on 10-year Treasury bonds swooped as low as 2.34 percent.
“The world, not just the U.S., is in uncharted waters,” said Doug Cote, chief market strategist at ING Investment Management. “All the ramifications of a debt downgrade of the global reserve currency are unfathomable at this time,” which is why stock investors have moved to the sidelines to await further fallout from the S&P decision.
Besides setting off a cascade of downgrades on other borrowers throughout the country, Mr. Cote noted that S&P is threatening to further downgrade the United States if Congress doesn’t stand by its commitment to enact at least minimal spending cuts of $2.1 trillion this fall or if economic growth deteriorates and starts to subtract from government revenues again.
S&P followed through on its downgrade of the United States on Monday by downgrading commensurately the ratings of major financial institutions that rely on the federal government for funding, including mortgage giants Fannie Mae and Freddie Mac, and most of the Federal Home Loan banks.
“It amounts to a vote of no confidence in the U.S. government,” said Nigel Gault, chief U.S. economist at IHS global Insight. “The U.S. political process is at present unable to deliver a long-term fix to stabilize the debt.”
Despite the downgrade, Mr. Gault said investors still view the U.S. Treasury market as “by far the largest and most liquid in the world, with no equal, and a relative safe haven in times of global stress.” U.S. bonds also are benefiting by comparison to the bonds of even more heavily indebted European countries like Greece, Spain and Italy, he said.