Worst day for Wall Street since 2008

Dow falls 512 in steepest decline since '08 crisis

David K. Randall
AP Business Writer
Aug. 04, 2011

NEW YORK — Gripped by fear of a new recession, the stock market suffered its worst day Thursday since the financial crisis in the fall of 2008. The Dow Jones industrial average fell more than 500 points, its ninth-steepest decline.

The sell-off wiped out the Dow's remaining gains for 2011. It put the Dow and broader stock indexes into what investors call a correction - down 10 percent from their highs in the spring.

"We are continuing to be bombarded by worries about the global economy," said Bill Stone, the chief investment strategist for PNC Financial.

Across the financial markets, the day was reminiscent of the wild swings that defined the financial crisis in September and October three years ago. Gold prices briefly hit a record high. Oil fell even more than stocks - 6 percent, or $5.30 a barrel. And frightened investors were so desperate to get into some government bonds that they were willing accept almost no return on their money.

It was the most alarming day yet in the almost uninterrupted selling that has swept Wall Street for two weeks. The Dow has lost more than 1,300 points, or 10.5 percent. By one broad measure kept by Dow Jones, almost $1.9 trillion in market value has disappeared.

For the day, the Dow closed down 512.76 points, at 11,383.68. It was the steepest point decline since Dec. 1, 2008.

Thursday's decline was the ninth-worst by points for the Dow. In percentage terms, the decline of 4.3 percent does not rank among the worst. On Black Monday in 1987, for example, the Dow fell 22 percent.

Two weeks ago, investors appeared worried about the deadlocked negotiations in Washington over raising the ceiling on government debt. As soon as the ceiling was raised, investors focused on the economy, and the selling accelerated.

On Thursday, growing fear about the weakening U.S. economy was joined by concern in Europe that the troubled economies of Italy and Spain might need help from the European Union.

The European Union has already given financial assistance to Greece and Ireland, two countries that have struggled to pay their debts. A financial rescue package for Italy or Spain might be more than the group of countries can handle.

Traders also unloaded stocks before Friday's release of the government's unemployment report for July, which is expected to show weak job growth and perhaps a rise in the unemployment rate, which is 9.2 percent.

Together, they produced "a perfect storm of selling," said Ryan Larson, head of U.S. equity trading for RBC Global Asset Management.

Until a week ago, Wall Street had mostly convinced itself that the U.S. economy would improve in the second half of the year. Gas prices were falling, and Japanese factories were resuming production after disruptions from the March earthquake.

Then one report after another began to show that the economy was much weaker than first thought.

Manufacturing is barely growing. The service sector, which covers about 90 percent of the American work force, is growing at the slowest rate in a year and a half. People spent less in June than in May, the first decline since September 2009.

And the overall economy is expanding at the slowest pace since the end of the Great Recession. It grew at an annual rate of just 0.8 percent for the first six months of this year, raising the risk of another recession.

In an indication of how frightened investors are, Bank of New York Mellon said it would start charging large investors to hold their cash because they are depositing so much. The bank's clients include pension funds and large investment houses that are selling stock and need to deposit the proceeds.

Mark Luschini, chief investment strategist for Janney Montgomery Scott, an investment firm in Philadelphia, said his clients saw the move from stocks into cash as "a parking lot to sort things out."

"With the scars of 2008 still fresh," he said, "some clients don't want to miss the chance to pre-empt further damage should it come."

Wells Fargo Advisers, a financial management company in St. Louis, said clients were more nervous.

"I wouldn't say they're totally panicking. But obviously nerves are rattled," said Scott Marcouiller, chief technical market strategist there. "And I think that is simply because of the speed of the decline."

Other market indicators reinforced the risk-averse mood. Gold, which is seen as a safe investment when the stock market is turbulent, set a record price, $1,684.90 an ounce, before falling to finish the day at $1,659. Adjusted for inflation, gold is still far below the record reached in 1980.

The yield on the 10-year Treasury note fell to 2.42 percent, its lowest of the year, and the yield on the 2-year Treasury note hit its lowest ever, 0.265 percent. Bond yields fall when demand for bonds increases.

The yield on the one-month Treasury bill fell to almost nothing - 0.008 percent. Investors were willing to accept paltry returns in exchange for holding investments they believed to be stable.

The sell-off was broad. All 10 industry groups in the Standard & Poor's 500 index fell. Energy companies lost almost 7 percent, materials companies were down 6.6 percent, and industrial companies lost more than 5 percent.

For a time, Kraft Foods was the only stock to rise among the 30 that make up the Dow industrials. Kraft announced Thursday that it would split in two, with one company focusing on snacks and the other groceries. But the selling eventually dragged Kraft under, too, and its stock finished down 52 cents, at $33.78.

Steep stock market losses like the ones of the past two weeks can be self-reinforcing. A drop in stocks erodes household wealth and raises doubts about the economic outlook.

The result can be what economists call a vicious cycle. Stock losses take a toll on consumer confidence and make people more reluctant to spend money. Consumer spending makes up 70 percent of economic output in the United States.

Kevin Cook, senior stock strategist for Zacks Investment Research in Chicago, said investors' worst fears probably won't come true.

"This is not 2008 again," he said. "We don't have a liquidity crisis, we don't have a credit crisis - this is just profit taking."

Cook said he believes the S&P 500, which closed Thursday at 1,200.07, will trade between 1,150 and 1,250 between now and Oct. 1, at least until investors have enough information to determine whether the economy is in recession again.

Even taking into account the recent declines, stocks are still considered to be in an impressive bull market that began March 9, 2009, when the market reached its recession low.

The Dow closed that day at 6,547. Since then, it is up about 74 percent.

One year ago, the Dow closed at 10,680. About a month later, the stock market began a rally that took the Dow almost to 13,000. The catalyst was an announcement by Federal Reserve Chairman Ben Bernanke that the Fed was preparing to launch a program to buy $600 billion in government bonds to keep interest rates low and help stocks rally.

The sell-off now comes at a time when corporate profits are growing. For the S&P 500, a measure called the forward price-to-earnings ratio has fallen to about 12, well below its long-term average of 16. That means that investors who buy now are paying less for each dollar in profits.

Based on what an investor now pays for corporate profits, stocks are now trading at their lowest levels in 20 years, said Tim Courtney, chief investment officer of Burns Advisory Group in Oklahoma City.

But few companies were spared in the sell-off Thursday. Just three of the 500 stocks in the S&P 500 moved higher. General Motors fell 4 percent despite beating analyst estimates for its quarterly earnings.

Summer of Recovery II coming to a close.

What will Obama's platform be throughout the campaign next year? Everything he's done has been disastrous. EVERYTHING!

Precisely! He has created massive new reams of regulations and taxes, launched a personal attack on Boeing via the NLRB, threatened to add even more pain and punishment to the private sector through cap-and-trade and card check, and has been a one-man wrecking crew on business and consumer confidence!

If one wanted a lesson on how to sink an economy, one need only study the actions Obama has taken.

Till now, this has had a minimal effect on Wall Street, but add in the disasters that are Greece, Portugal, Ireland, Spain and Italy, and the markets have finally had all that they can take. Particularly since Obama has clearly demonstrated that he want's to follow in the footsteps of those ailing European nations.

What amazes me even more than Obama is how his followers are clinging to his every word and action. It's unreal reading blogs and comments on articles by readers. It totally dumbfounds me to no end.

Nobody sees me defending Bush's economic record and never has seen me defending it. I walked away in 2005 from him and the GOP. Our American liberals seemed determined to follow Obama right off of a cliff.

TexasBlue wrote:What amazes me even more than Obama is how his followers are clinging to his every word and action. It's unreal reading blogs and comments on articles by readers. It totally dumbfounds me to no end.

Nobody sees me defending Bush's economic record and never has seen me defending it. I walked away in 2005 from him and the GOP. Our American liberals seemed determined to follow Obama right off of a cliff.

Ann Coulter (who makes liberals heads explode) has written an excellent book (her latest release in fact) which describes this phenomenon - the mob mentality as it were. I highly recommend it. It's titled "Demonic - How the Liberal Mob is Endangering America."

Naturally, in keeping with Ann's style, the title is provocative, but Ann's research work is impeccable - she is no dummy that woman.

Let me know how it is. I'm not the biggest fan of hers.

TexasBlue wrote:Summer of Recovery II coming to a close.

What will Obama's platform be throughout the campaign next year? Everything he's done has been disastrous. EVERYTHING!

The 512-point drop was due specifically to the debt reduction deal, AIUI, i.e. the market reacting with fear to it.

European fears are playing into this also.

I agree with Kronos. The downgrading of the US had a great effect on the stock levels falling. I also read a good article about that in the Economist... I read a lot of articles in the Economist today, as you might have noticed.

http://www.economist.com/blogs/freeexchange/2011/08/sps-credit-rating-cut

A quote to answer the debate about "America will never be unable to pay" as claimed by many TPers:

"America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point."

Also, what S&P said about taxes in America:

What S&P had to say about taxes
Apr 23rd 2011, 20:10 by G.I. | WASHINGTON, D.C.

BOTH Paul Krugman and Ezra Klein argue that America is lightly taxed, relative either to other countries or to history. But why take it from them? Here’s what Standard & Poor’s had to say the day they assigned a negative outlook to America’s AAA credit rating:

"The U.S. public sector consistently uses a smaller share of national income than the public sectors of most 'AAA' rated countries, and smaller than those of its closest peers, implying greater revenue flexibility. Political considerations aside, from an economic perspective, the U.S. public sector's smaller share of national income suggests to us there could be room for the U.S. to raise taxes or increase other government revenue while remaining competitive. We believe that this flexibility also enhances the U.S.'s ability to pay."

Of course, our ability to pay isn't the issue. S&P lowered its outlook because it questioned our willingness to pay.

BubbleBliss wrote:Of course, our ability to pay isn't the issue. S&P lowered its outlook because it questioned our willingness to pay.

This is not financial analysis. It's political analysis. This is not what S&P does. It is outside their area of competence, and they should knock it off. IT IS NOT HELPING.

S&P is going their financial analysis, the political analysis is done by others.

S&P is certainly doing plenty of political analysis themselves, or trying to. "Our willingness to pay" is a political question, not a financial question.

S&P wrote:More broadly, the downgrade reflects our view that the effectiveness,
stability, and predictability of American policymaking and political
institutions have weakened at a time of ongoing fiscal and economic
challenges to a degree more than we envisioned when we assigned a
negative outlook to the rating on April 18, 2011.

^Political analysis.

S&P wrote:Since then, we have changed our view of the difficulties in bridging the
gulf between the political parties over fiscal policy, which makes us
pessimistic about the capacity of Congress and the Administration to be
able to leverage their agreement this week into a broader fiscal
consolidation plan that stabilizes the government's debt dynamics any
time soon.

^Political analysis.

S&P wrote:We lowered our long-term rating on the U.S. because we believe that the
prolonged controversy over raising the statutory debt ceiling and the related
fiscal policy debate indicate that further near-term progress containing the
growth in public spending, especially on entitlements, or on reaching an
agreement on raising revenues is less likely than we previously assumed and
will remain a contentious and fitful process. We also believe that the fiscal
consolidation plan that Congress and the Administration agreed to this week
falls short of the amount that we believe is necessary to stabilize the
general government debt burden by the middle of the decade.

^Political analysis, except for the last sentence.

S&P wrote:Nevertheless, we view the U.S.
federal government's other economic, external, and monetary credit attributes,
which form the basis for the sovereign rating, as broadly unchanged.

^Financial analysis. Our financial situation has not changed, yet they downgrade us, because of their judgment of our political situation.

S&P wrote:The political brinksmanship of recent months highlights what we see as
America's governance and policymaking becoming less stable, less effective,
and less predictable than what we previously believed. The statutory debt
ceiling and the threat of default have become political bargaining chips in
the debate over fiscal policy. Despite this year's wide-ranging debate, in our
view, the differences between political parties have proven to be
extraordinarily difficult to bridge, and, as we see it, the resulting
agreement fell well short of the comprehensive fiscal consolidation program
that some proponents had envisaged until quite recently. Republicans and
Democrats have only been able to agree to relatively modest savings on
discretionary spending while delegating to the Select Committee decisions on
more comprehensive measures. It appears that for now, new revenues have
dropped down on the menu of policy options. In addition, the plan envisions
only minor policy changes on Medicare and little change in other entitlements,
the containment of which we and most other independent observers regard as key
to long-term fiscal sustainability.
Our opinion is that elected officials remain wary of tackling the
structural issues required to effectively address the rising U.S. public debt
burden in a manner consistent with a 'AAA' rating and with 'AAA' rated
sovereign peers (see Sovereign Government Rating Methodology and Assumptions,"
June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in
framing a consensus on fiscal policy weakens the government's ability to
manage public finances and diverts attention from the debate over how to
achieve more balanced and dynamic economic growth in an era of fiscal
stringency and private-sector deleveraging (ibid). A new political consensus
might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term
fiscal adjustment potentially greater, and the inflection point on the U.S.
population's demographics and other age-related spending drivers closer at
hand (see "Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even
More Green, Now," June 21, 2011).

^A big steaming heap of political analysis, there.

And so on.

Source

So, there is some financial analysis sprinkled in there, but the downgrade was mainly due to a political analysis on S&P's part. And my question is, when did S&P decide they were political analysts, and what makes them competent to make this call?

Good points. The thing is that S&P isn't a very competent rating agency to begin with. After all, they bought some of the bad housing credits before that bubble burst in 2008/2009.
It is their job to analyse political systems and such political actions such as the deficit reduction plan.

BubbleBliss wrote:A quote to answer the debate about "America will never be unable to pay" as claimed by many TPers:

"America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point."

That's BS. NO Tp'r has said we can't pay off the debt. That's just bullshit at it's best.

But on the flip side, we can just raise taxes during 9.1% unemployment, spend even more money.... and see where it gets us.

For the life of me, I cannot understand why nobody bothers to entertain the idea of cutting waste from the US gov't. There's plenty of it. Many politicians don't have the gonads to do it. It might endanger their job (reelection).

BubbleBliss wrote:
Also, what S&P said about taxes in America:

What S&P had to say about taxes
Apr 23rd 2011, 20:10 by G.I. | WASHINGTON, D.C.

BOTH Paul Krugman and Ezra Klein argue that America is lightly taxed, relative either to other countries or to history. But why take it from them? Here’s what Standard & Poor’s had to say the day they assigned a negative outlook to America’s AAA credit rating:

"The U.S. public sector consistently uses a smaller share of national income than the public sectors of most 'AAA' rated countries, and smaller than those of its closest peers, implying greater revenue flexibility. Political considerations aside, from an economic perspective, the U.S. public sector's smaller share of national income suggests to us there could be room for the U.S. to raise taxes or increase other government revenue while remaining competitive. We believe that this flexibility also enhances the U.S.'s ability to pay."

Of course, our ability to pay isn't the issue. S&P lowered its outlook because it questioned our willingness to pay.

Paul Krugman and Ezra Klein are both committed left wingers. Of course they want higher taxes.

Who claimed that the TPers said that the US can't pay its debt

TexasBlue wrote:

BubbleBliss wrote:
Also, what S&P said about taxes in America:

What S&P had to say about taxes
Apr 23rd 2011, 20:10 by G.I. | WASHINGTON, D.C.

BOTH Paul Krugman and Ezra Klein argue that America is lightly taxed, relative either to other countries or to history. But why take it from them? Here’s what Standard & Poor’s had to say the day they assigned a negative outlook to America’s AAA credit rating:

"The U.S. public sector consistently uses a smaller share of national income than the public sectors of most 'AAA' rated countries, and smaller than those of its closest peers, implying greater revenue flexibility. Political considerations aside, from an economic perspective, the U.S. public sector's smaller share of national income suggests to us there could be room for the U.S. to raise taxes or increase other government revenue while remaining competitive. We believe that this flexibility also enhances the U.S.'s ability to pay."

Of course, our ability to pay isn't the issue. S&P lowered its outlook because it questioned our willingness to pay.

Paul Krugman and Ezra Klein are both committed left wingers. Of course they want higher taxes.

`

Still doesn't change the S&P Quote....

BubbleBliss wrote:
Who claimed that the TPers said that the US can't pay its debt

Your post here.

A quote to answer the debate about "America will never be unable to pay" as claimed by many TPers: