08.08.11 9:22 PM ET
Wall Street Bloodbath
Wall Street Ends Disastrous Trading Day
U.S. markets closed in deep decline on Monday as jittery investors responded to Standard & Poor’s downgrade of our nation’s credit rating. U.S. stocks plummeted after gloomy openings in European and Asian Markets, and investor anxiety increased with news that mortgage giants Fannie Mae and Freddie Mac had also suffered credit rating downgrades. By the end of the day, the Dow Jones industrial average had dropped more than 600 points— its biggest one-day decline since the height of the financial crisis in December, 2008. Standard & Poor’s 500 index dipped more than 6 percent, while the Nasdaq dropped nearly 7 percent. Financial stocks were among the hardest hit in the slump and fell as much as 10 percent during final hours of trading. The value of gold, meanwhile, hit records as investors’ fled to safety.
Well, that was a bomb. As President Obama delivered his speech—nearly an hour after scheduled—the networks showed the Dow as he spoke. It wasn’t pretty—it went down, and down, and down. So why did it fail to reassure the market? Business Insider’s Joe Weisenthal speculates that Obama was conflating the market troubles with the S&P downgrade, when they’re actually two separate problems. In his speech, Obama talked about deficit reduction and the supercommittee—measures that respond to S&P’s long-term worries about American debt, but don’t do anything to stabilize the current turmoil. “See, if we were giving that speech, amid this market, we’d have said: ‘Congress, get back in session, and
Standard & Poor’s downgrade of U.S. debt has taken a toll on mortgage-finance giants Fannie Mae and Freddie Mac, which were taken over by the U.S. government in 2008. Fannie and Freddie rely heavily on the government to purchase mortgages from banks, though it’s not clear whether the downgrade will affect their borrowing costs. While S&P itself worried that interest rates would spike after the downgrade, a jump in mortgage rates now seems unlikely, given that Treasury yields fell on Monday. The Federal Home Loan Banks will also suffer in the fallout from S&P’s credit downgrade, though AAA-rated businesses like Johnson & Johnson will keep their good ratings.
From across the pond, American handwringing might look downright precious—if the situation weren’t so perilous, writes Stefan Theil. Although one might expect that a downgrade in American credit would be a boon to Europe, it’s the eurozone that will bear the brunt of the move. With its economies already in precarious shape, any hysteria in the markets will kick Europe while it’s already down. Worse, euro economies can’t rely on inflation and central banks to save them, since there’s one common bank for the whole area. If the European Central Bank has to extend further bailouts to its members, the result might be a downgrade in French debt from its AAA rating. That’s why the weekend saw Angela Merkel, Nicolas Sarkozy, and Silvio Berlusconi taking time away from their summer vacations to confer: they could be hit hard by S&P’s announcement.
As panic hit markets across the globe Monday, a new Tumblr full of photos of exasperated traders picked up viral steam. Sad Guys on Trading Floors is … exactly what it sounds like.
Global stocks tumbled again Monday as the U.S. credit-rating downgrade by S&P sent jitters through markets. The worries outweighed relief that the European Central Bank pledged to buy up Italian and Spanish bonds to help the two countries avoid defaults. European markets were firmly in the red despite their early momentum, and losses were heavy in Asia. Hong Kong’s Hang Seng Index and Japan’s Nikkei slid more than 2 percent, and the Shanghai Composite Index lost nearly 4 percent.
President Obama and his economic team really have their work cut out for them: If the U.S. economy returns to a recession, it could be a lot more painful than the last one. (The one we call The Great Recession.) That, as The New York Times points out, is because economic indicators are at a much worse starting point because they have not recovered from the previous blow. Unemployment is at 9.1 percent as compared with 5 percent in December 2007; industrial production is 8 percent lower than it was in December 2007; and the overall economy is, in fact, smaller than it was four years ago. Corporate America, meanwhile, is sitting on $2 trillion in cash, according to the New York Post.
Treasury Secretary Timothy Geithner’s decision to remain at his post through the 2012 election appears to have put some fire in his belly: He ripped into S&P on CNBC for its credit downgrade of the United States, saying “S&P has shown really terrible judgment and they’ve handled themselves very poorly.” He added, “They’ve shown a stunning lack of knowledge about basic U.S. fiscal budget math.” (S&P’s decision was based, in part, upon math that included a $2 trillion miscalculation.) The Wall Street Journal says that President Obama considers the move “unjustified” and will push that message this week.