U.S. Stocks Fall as S&P 500 Has Biggest Slump Since November ’08

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Photographer: Mario Tama/Getty Images

The Dow plunged more than 500 points in afternoon trading after Standard & Poor's downgraded the U.S. credit rating.

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Photographer: Mario Tama/Getty Images

The Dow plunged more than 500 points in afternoon trading after Standard & Poor's downgraded the U.S. credit rating. Close

The Dow plunged more than 500 points in afternoon trading after Standard & Poor's downgraded the U.S. credit rating.

Photographer: Scott Eells/Bloomberg

The U.S. credit rating downgrade extended a rout that wiped out $1.94 trillion in market value from the country’s stocks. S&P lowered the U.S. long-term rating one level to AA+ after markets closed on Aug. 5 while keeping the outlook at “negative” as the company becomes less confident that Congress will end Bush-era tax cuts or tackle entitlements. Close

The U.S. credit rating downgrade extended a rout that wiped out $1.94 trillion in market value from the country’s... Read More

Photographer: Scott Eells/Bloomberg

A trader works on the floor of the New York Stock Exchange on Aug. 8, 2011. Close

A trader works on the floor of the New York Stock Exchange on Aug. 8, 2011.

Photographer: Jin Lee/AP

Traders work on the floor of the New York Stock Exchange on Aug. 8, 2011. Close

Traders work on the floor of the New York Stock Exchange on Aug. 8, 2011.

U.S. stocks tumbled, giving the Standard & Poor’s 500 Index its worst slump since November 2008, amid concern that a downgrade of the nation’s credit rating by S&P may worsen an economic slowdown.

The 10 groups in the S&P 500 fell between 1.7 percent and 5.6 percent. Ford Motor Co. (F), Dow Chemical Co. (DOW) and Caterpillar Inc. (CAT) slumped at least 5.1 percent, pacing losses in stocks most- tied to the economy. Bank of America Corp. (BAC) tumbled 15 percent to lead a gauge of financial companies lower. Energy shares had the second-biggest decline in the S&P 500, sinking 4.4 percent as oil fell to an eight-month low. Newmont Mining Corp. (NEM) rallied 4.9 percent after gold climbed to a record.

The S&P 500 fell 3.7 percent to 1,154.64 at 12:29 p.m. in New York. The gauge slumped 8.5 percent in three days, the most since November 2008, and fell to the lowest since Oct. 4, on a closing basis. The Dow Jones Industrial Average slid 339.33 points, or 3 percent, to 11,105.28. Equity indexes extended losses after S&P changed the outlook for Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) to "negative" from "stable."

“There’s no reason to get in front of this train,” Keith Wirtz, Cincinnati-based chief investment officer at Fifth Third Asset Management, which oversees $16.7 billion, said in a telephone interview. “Yes, there’s cheapness in the stock market, but right now emotions are high. There’s enough uncertainty out there. People are moving towards no risk. That includes Treasuries, which is ironic.”

Wiped Out

The downgrade extended a rout that had wiped out $1.94 trillion in market value from the country’s stocks as manufacturing and consumer spending data showed the world’s largest economy is slowing. The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 19 percent to 38.07, the highest since May 2010, on a closing basis.

S&P lowered the U.S. long-term rating one level to AA+ after markets closed on Aug. 5, while keeping the outlook at “negative” as the company becomes less confident that Congress will end Bush-era tax cuts or tackle entitlements. S&P also said the U.S. rating may be reduced to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt.

Equities extended losses today as S&P also lowered credit ratings on Fannie Mae, Freddie Mac and other lenders with a “direct reliance on the U.S. government,” spurring concern over the ripple effects of the loss of America’s AAA rating.

Treasuries Rally

Treasuries rose today. Two-year yields fell to a record low after Japanese Finance Minister Yoshihiko Noda said U.S. Treasuries were attractive. Group of Seven nations said they will take every action necessary to stabilize financial markets after the U.S. credit rating downgrade.

“The U.S. Treasury no longer has, according to S&P, a gold star,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, said in a telephone interview. His firm oversees more than $38 billion. “Still, if you’re an investor and you say -- I’m worried about what’s going on in the world, I’m worried about liquidity and safety, you basically have no place to go other than the Treasury market.”

Barton Biggs, who last week called U.S. equities a "strong buy," said he cut risk in his Traxis Partners LP hedge fund. “I’ve taken some risk off, and I hate to do it, I think it’s probably the wrong thing to be doing,” Biggs, who helps manage $1.4 billion as managing partner and co-founder of Traxis, said in a Bloomberg Television interview. “But I’m a fiduciary to a certain extent, and I’ve got to protect my capital.”

Ford, Caterpillar

The Morgan Stanley Cyclical Index of 30 stocks tumbled 4.8 percent. The Dow Jones Transportation Average, which is also a proxy for the economy, retreated 4 percent. Ford sank 6.8 percent to $10.10. Dow Chemical fell 7 percent to $28.10. Caterpillar decreased 5.1 percent to $86.33.

The KBW Bank Index of 24 stocks slumped 5.7 percent. Bank of America dropped 15 percent, the most in the S&P 500, to $6.98. American International Group Inc. (AIG) disclosed plans to sue the largest U.S. lender by assets over allegedly faulty mortgages.

“The bias that exists, and that is gaining credibility, is that a double dip is ahead of us,” said Charles Peabody, an analyst at Portales Partners LLC in New York. “If that’s the case, then something like Bank of America is going to have to raise substantial equity externally.”

The U.S. downgrade will “reinforce this really uncertain financial market climate that we are confronting right now,” David Rosenberg, the chief economist for Gluskin Sheff & Associates Inc., in Toronto, said in a telephone interview Aug. 6. “You’re probably going to see investors becoming more defensive. That means that they are moving to Treasuries or to cash or to gold.”

Gold Climbs

Gold climbed to more than $1,700 an ounce for the first time amid concern that the global economy is slowing. Oil and copper tumbled. Exxon Mobil dropped 2.6 percent to $72.89. Chevron Corp. (CVX) decreased 3.8 percent to $93.93. Newmont Mining rallied 4.9 percent, the most in the S&P 500, to $57.08.

Only four other stocks in the S&P 500 advanced. O’Reilly Automotive Inc. (ORLY), an auto-parts retailer, gained 0.7 percent to $58.78. Procter & Gamble Co. (PG), the world’s largest consumer- products company, rose 0.5 percent to $60.90, and was also the only gainer in the Dow. Hershey Co., the maker of chocolate Kisses and Reese’s candies, and National Semiconductor Corp. added less than 0.1 percent.

Strategists

The downgrade may spook investors, causing sentiment to grow more bearish in the short term, but corporate fundamentals, including balance sheets with more cash than debt and earnings growth, will continue to push the S&P 500 higher by the end of the year, strategists at Barclays Plc, Citigroup Inc. and JPMorgan Chase & Co. said. While Goldman Sachs Group Inc. cut its year-end target for the S&P 500 to 1,400, Barclays held its 1,450 estimate.

“The medium to long-term effects of the U.S. sovereign downgrade are minimal, even as the short impact could be turbulent,” Thomas Lee, JPMorgan’s equity strategist in New York, wrote in an e-mailed note.

The S&P 500 retreated 11 percent from July 22 through Aug 5 amid concern about an economic slowdown. The benchmark gauge for American equities was still up 77 percent from a 12-year low through Aug. 5 following government stimulus measures and higher-than-estimated corporate earnings.

Earnings Season

Per-share earnings increased 18 percent among the S&P 500 companies that have released quarterly results since July 11, according to data compiled by Bloomberg. About three-quarters of the companies have topped the average analyst profit forecast, the data show. Sales rose 13 percent during that period.

“We had a terrific earnings season,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $275 billion. “We’re not going into a recession. Now is not the time to panic. This is where you start to put cash back to work.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net

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