Standard & Poor’s downgraded the US credit rating by a notch, delivering a crushing blow to benchmarks on Monday. Tension from the other side of the Atlantic also dampened sentiment as Europe was gripped by debt woes. Investors also struggled to find a clear answer about whether the recent turmoil means that another recession is in the offing, at a time when the economy is yet to recover from the last one.
The credit rating agency’s decision came in on Friday last week after the closing bells. Monday was thus the first trading day after the downgrade, and almost immediately benchmarks ended up in the red. This is the first time that the US has lost its AAA rating since 1917. The Dow Jones Industrial Average (DJIA) posted its sixth-worst point decline in the last 112 years, plunging 5.6% to settle at 10809.85. The blue-chip index moved below the 11K mark for the first time since November last year. The Standard & Poor 500 (S&P500) sank 6.7% to finish at 1,119.46 and the Nasdaq lost 6.9% to close the day at 2,357.69.
Since the “flash crash” of May 6, 2010, yesterday’s session marked the busiest day as consolidated volumes on the New York Stock Exchange, Amex and Nasdaq were 17.89 billion shares, more than twice that of last year’s daily average of 8.47 billion. A hefty 9.9 billion shares were traded on the NYSE alone, the fourth-highest level on record and the highest since September 2008. Decliners easily outnumbered advancers, as for 70 stocks that declined, only one managed to move up.
Reflecting the fears of the trading session, that came on the heels of the worst performing day since the financial downturn in 2008, the fear-gauge CBOE Volatility Index (VIX) sky-rocketed 50% and marked its sharpest increase since February 2007.
All of the 10 industry groups in the S&P 500 declined by over 3.5% and none of its stocks were in positive territory. More than a month earlier, economists were predicting that the S&P 500 would test the 1, 250 level. The index had managed to save itself from receding to those lows when a few minds had opined that it would fall. But with the recent plunge, the index has taken quite a beating and has moved way below that mark.
The Dow followed a similar pattern, as all the 30 components of the blue-chip index settled in the negative zone with losses touching as much as 20.3% in the case of Bank of America Corporation (NYSE:BAC). Other heavy decliners include Alcoa, Inc. (NYSE:AA), American Express Company (NYSE:AXP), Caterpillar Inc. (NYSE:CAT), General Electric Co. (NYSE:GE), JPMorgan Chase & Co. (NYSE:JPM), Merck & Co. Inc. (NYSE:MRK), The Travelers Companies, Inc. (NYSE:TRV) and Verizon Communications Inc. (NYSE:VZ) and they lost 11.4%, 8.8%, 9.2%, 6.5%, 9.4%, 5.6%, 7.6% and 5.5%, respectively.
Coming to individual sectors, financials have been a big laggard this year and this was the case even yesterday with the Financial Select Sector SPDR (XLF) fund losing 9.5%. Amidst these developments, President Barack Obama’s statement during the afternoon provided little relief to financials, nor any encouragement which could lift the benchmarks. President Obama said: “Markets will rise and fall,” and added: “But this is the United States of America. No matter what some agency may say, we’ve always been and always will be a triple-A country”. However, as he urged Washington to display more “common sense and compromise” to deal with debt issues; the S&P’s downgrade had already jolted the markets.
Standard & Poor’s downgraded the US credit rating by a notch to AA+, bringing an end to the AAA rating that the US had possessed for almost a century. Following concerns over lifting the debt-ceiling, the S&P went on to reduce the US credit rating stating that policy making had become “less stable, less effective and less predictable than what we previously believed” and “at a time of ongoing fiscal and economic challenge”. The rating agency also questioned the “effectiveness, stability, and predictability’ of the ‘political institutions”. The game of attrition that went on in the nation saw the Republicans and Democrats agreeing on the need to reduce the annual budget deficits, but they failed to uniformly decide on how to bring about the reduction.
The US has moved down to AA+ rating, followed by Asian giants Japan, China and Taiwan, who have AA- ratings. However, concerns about the global economy prevented any of these Asian countries from enjoying a cheerful day. Bourses dipped substantially worldwide because of the US credit downgrade and global concerns. With the US no longer part of AAA rated nations, only UK, France, Germany and Canada share the highest rating. Three of those four nations belong to the European continent, but concerns about debt crisis are fast spreading in the euro-zone as well. Ireland, Greece and Portugal have faced tough times recently, and it is now being feared that economic turmoil will spread to larger economies like Italy and Spain. The European Central Bank has therefore jumped in to buy Italian and Spanish bonds.
Amid the gloom, investors sought to protect their funds and ran for cover in safer places. What looked as an irony, despite the downgrade, was that investors felt confident enough to invest in US debt. Treasury prices rose significantly and yields dipped. The yield on 10-year Treasury note sank to 2.3%. Gold enjoyed huge gains as it posted a record settlement of $1, 713.20, jumping $61.40 per ounce.
Separately, crude oil prices plunged 6.4% to $81.31 per barrel as an opinion emerged that a weaker economy would mean lower demand. This was lowest level recorded this year and the fall also took its toll on energy shares. Energy stocks like Exxon Mobil Corporation (NYSE:XOM), Chevron Corp. (NYSE:CVX), Marathon Oil Corporation (NYSE:MRO), ConocoPhillips (NYSE:COP) and Petroleo Brasileiro (NYSE:PBR) declined 6.2%, 7.5%, 10.5%, 8.6% and 10.0%, respectively.
Even though there are fears about a fresh economic crisis, its might be too early to conclude that such a scenario will ultimately emerge. Investors need to keep in mind that Moody’s still retains its AAA rating for the US. Moody’s said that it would only downgrade the rating if the country fails to reduce its deficit and stated: “but it is early to conclude that such measures will not be forthcoming”. Separately, Goldman Sachs said that the chance of a downturn is only one out of three, probably in the next six to nine months.
