Monday, August 8, 2011

Dow Jones Industrial Average

Wall Street stocks plummeted Monday morning on the first-ever downgrade of the United States’ credit rating, with the Dow Jones Industrial Average plunging as much as 380 points in the first hour of trading.
The move by Standard & Poor’s over the weekend to cut the U.S. rating from AAA to AA-plus shook confidence among global investors and added to worries that the world’s largest economy could sink into a double-dip recession.
Investors dumped stocks and fled into safe havens such as gold, which rose to record highs of more than $1,700 an ounce. Ironically, U.S. Treasury bonds were not hurt by the downgrade and continued to be a destination for investors fleeing mayhem in the stock market. The yield on Treasury’s 10-year bond fell as low as 2.38 percent.
With the Dow threatening to crash through 11,000, most major U.S. indexes fell by 3 percent to 4 percent. Asian and European stock markets also took a pummeling overnight, losing from 2 percent to 3 percent of their value.
“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 stabilise 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 such as Greece, Spain and Italy, he said.
S&P added to market pressures on Monday by downgrading major financial institutions that rely on the U.S. government for funds, including mortgage giants Fannie Mae and Freddie Mac and most of the Federal Home Loan Banks.
Some highly rated states and cities also are waiting with bated breath to see if S&P will cut their ratings because of their dependence on federal aid.
S&P warned that another cut in the U.S. rating could come as soon as November if Congress does not follow through with the minimal spending cuts of about $2.1 trillion that it agreed to make in a debt compromise last week. The U.S. also could be downgraded further if the economy deteriorates further, leading to even larger U.S. budget deficits because of lower revenues and higher unemployment spending, S&P said.
S&P executive David Beers told Reuters television that President Obama could stabilize the rating by refusing to sign any extension of President George W. Bush’s tax cuts. The ratings agency has indicated that both increased revenues and far-reaching reforms in entitlement programs such as Medicare, Medicaid and Social Security are needed for the U.S. regain control over its debt and maintain or improve its rating in the future.
Congressional deadlock over making those changes is what led to the downgrade. The unprecedented loss of America’s top rating over the weekend appeared to do little to stop the political feuding. Both parties continue to blame the other for the loss of confidence.