Markets suffer worst day since ’08 crisis

August 8, 2011

Wall Street suffered its worst day of trading since the 2008 financial crisis as investors reacted to the historic downgrade of U.S. credit by selling so heavily they wiped out $1.2 trillion of stock market wealth Monday.

The sell-offs came on top of worsening fears about the health of the global economy, which was already hobbled by uncertainty about the European debt crisis before Standard & Poor’s stripped away the U.S. top-notch triple-A credit rating for the first time Friday night.

The downgrade prompted President Obama to reassure markets on Monday that the United States will “always be a triple-A country” regardless of what credit agencies say. But just about the only reaction the market could muster to the downgrade was heavy, indiscriminate selling of every sector of the economy and record-setting hoarding of safe assets such as gold.

Every single sector and every single stock in the Dow Jones Industrial Average and the Standard & Poor’s 500 — the two biggest benchmarks of U.S. stock market performance — settled lower Monday, with the Dow tumbling 5.6 percent and the S&P plummeting 6.7 percent. It was the single worst percentage drop for both indexes since Dec. 1, 2008, as well as for the Nasdaq, a more tech-heavy index, which settled down 6.9 percent.

The Standard & Poor’s 500 is now down more than 11 percent over three days — a decline that qualifies as a correction, or a major adjustment in the direction of the market.

Financial stocks in particular led markets lower. Shares of Bank of America plummeted 20 percent to $6.53 and traded as low as $6.31 — a 52-week low. Shares of Citigroup, Barclays and Morgan Stanley also saw double-digit percentage drops as investors sold off their shares in volumes reminiscent of the financial crisis.

Investors also retreated heavily from tech stocks, which had attracted steadily increasing valuations as investor excitement built up over expected public offerings of social networking firms. Social networking firms that went public, such as LinkedIn, quickly saw their shares double in value while others that remained private saw their private valuations soar, with social networking giant Facebook said to be eyeing an IPO that would value it at $100 billion, or twice its reported valuation earlier this year.

“Their valuations tend to be very sensitive to market movements, typically rising twice as much or falling twice as much as the market,” Jay Ritter, professor of finance at the University of Florida who studies IPOs, said in an e-mail. “Thus, the market declines of about 15 percent from the peak earlier this year would suggest that the valuations have dropped by about 30 percent. This doesn’t mean that the social media companies are dirt cheap, but it does mean that the valuations aren’t quite as difficult to rationalize as was the case a month ago,” he said.

LinkedIn shed more than 17 percent of its value Monday. Mainstays of the tech world — including Google, Apple, Amazon and eBay — also saw their values plummet, indicating investors had lost some of their fervor for high-flying tech stocks.

Instead, investors flocked to gold, a safe haven that rallied to a new nominal high of $1,720.40 per Troy ounce before falling to $1,710 in futures trading Monday. That puts gold up nearly 4 percent from its Friday close of $1,649.10, indicating investors have grown more nervous since the U.S. credit downgrade.

But the downgrade didn’t scare investors away from U.S. Treasury bonds, another safe-harbor investment that saw heavy buying Monday. Investors bid down yields on the Treasury’s 10-year bond to 2.32 percent, their lowest level so far this year. A lower yield indicates investors are willing to accept a lower return in exchange for the safety of holding government debt.

Stephen Wood, chief market strategist at money manager Russell Investments in New York, pinned the positive response on investors’ long-term bullishness that leaders in Washington will eventually get the U.S. debt problem under control.

“For the first time that I’m aware of, you finally have Democrats and Republicans asking how do we get entitlements, medical costs and government pensions under control,” he said.

“It’s not a small silver lining” to the debt downgrade, he added.

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