U.S. Stocks Drop as Rating Downgrade Raises Concern
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. Photographer: Scott Eells/Bloomberg
Aug. 8 (Bloomberg) -- Peter Fisher, head of fixed income at BlackRock Inc., talks about Standard & Poor’s decision to cut the U.S. credit rating, and its impact on markets and investment strategy. Fisher speaks from New York with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Aug. 8 (Bloomberg) -- Barry Knapp, head of U.S. equity strategy at Barclays Capital, discusses Standard and Poor's downgrade of the U.S.'s debt rating to AA+ from AAA and the prospects for the U.S. economy. Knapp, speaking with Betty Liu and Erik Schatzker on Bloomberg Television's "In the Loop," also talks about the outlook for the equity market. (Source: Bloomberg)
Aug. 8 (Bloomberg) -- Dino Kos, managing director of Hamiltonian Associates, talks about Standard & Poor's decision to downgrade the U.S. credit rating from AAA to AA+ and the impact on global financial markets. Kos speaks with Lisa Murphy on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)
A trader works on the floor of the New York Stock Exchange on Aug. 8, 2011. Photographer: Scott Eells/Bloomberg
U.S. stocks tumbled, following the biggest weekly drop in the Standard & Poor’s 500 Index since 2008, amid concern that a downgrade of the nation’s credit rating by S&P may worsen an economic slowdown.
All 10 groups in the S&P 500 fell at least 1.5 percent. Ford Motor Co. (F), Dow Chemical Co. (DOW) and Caterpillar Inc. (CAT) slumped at least 5.7 percent, pacing losses in stocks most-tied to the economy. Bank of America Corp. (BAC) tumbled 9.6 percent to lead a gauge of financial companies lower. Energy shares had the biggest decline in the S&P 500 within 10 groups, sinking 4.3 percent as oil sank to an eight-month low. Newmont Mining Corp. (NEM) rallied 3.2 percent after gold climbed to a record.
The S&P 500 fell 3.4 percent to 1,159.17 at 10:56 a.m. in New York, after losing 7.2 percent last week. The benchmark gauge for American equities fell to the lowest since Oct. 12, on a closing basis. The Dow Jones Industrial Average decreased 328.92 points, or 2.9 percent, to 11,115.69. Stocks extended losses after S&P lowered credit ratings on government-related lenders including Fannie Mae and Freddie Mac.
“It’s panic selling,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $275 billion. “There are no fundamental reasons for the selloff. We’re not going into a recession. We had a terrific earnings season. Now is not the time to panic. This is where you start to put cash back to work.”
Wiped Out
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.
Stocks have slumped for two straight weeks as manufacturing and consumer spending data showed the world’s largest economy is slowing. The S&P 500 rose as much as 1.5 percent in the first five minutes of trading on Aug. 5 as the Labor Department said American employers added more jobs than forecast in July and the unemployment rate fell for the first time in four months. The index turned lower on growing speculation that S&P was preparing to strip the U.S. of its AAA rating for the first time.
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.
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 said he’s “taken some risk off” his investments at his hedge fund Traxis Partners LP. “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 4.7 percent. The Dow Jones Transportation Average, which is also a proxy for the economy, retreated 3.7 percent. Ford sank 7 percent to $10.08. Dow Chemical fell 5.8 percent to $28.47. Caterpillar decreased 5.7 percent to $85.83.
The KBW Bank Index of 24 stocks slumped 4.3 percent. Bank of America dropped 9.6 percent, the most in the S&P 500, to $7.39. American International Group Inc. disclosed plans to sue the largest U.S. lender by assets over allegedly faulty mortgages. Citigroup Inc. (C) slid 6.6 percent to $31.23.
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 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 2.5 percent to $72.93. Chevron Corp. (CVX) decreased 3.3 percent to $94.37. Newmont Mining rallied 3.2 percent, the most in the S&P 500, to $56.17.
Spooked Investors
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 Scorecard
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.
“From an earnings perspective, I’d rather use this environment to be more of a net buyer than a net seller,” David Sowerby, a Bloomfield Hills, Michigan-based money manager at Loomis Sayles & Co., which oversees $150 billion, said in a telephone interview Aug. 6. “The rally that started in March 2009 is still in play.”
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