The stock market buckled Monday under the weight of a crisis in Europe and danger of recession at home. Reeling from a downgrade of American debt, the Dow Jones industrials plunged 634 points.
It was the worst day for the market since the financial crisis in the fall of 2008 and extended Wall Street’s sudden, sharp decline. Stocks have lost 15 percent of their value in just two and a half weeks.
Monday was the first trading day since Standard and Poor’s downgraded the United States’ risk-free credit rating, and the selling started at the opening bell. The Dow dropped 250 points in minutes. For the rest of the day, investors looked for safer places for their money. With few buyers left for stocks, the market could only drift lower.
The Dow finished the day down 5.5 percent. The point decline was the worst since Dec. 1, 2008, and the sixth-steepest ever. The average ended at 10,809.85, its first close under 11,000 since November.
In a bit of irony following the S&P downgrade, investors decided U.S. debt was one of the safest places to be. They also sought refuge in gold, which set a record price.
“The S&P downgrade of U.S. government debt is the least of our problems,” said economist Scott Brown at Raymond James & Associates. “The bigger worry is subpar economic growth and the threat of a new recession.”
Economists at Goldman Sachs peg the chances of another recession at one in three, most likely in the next six to nine months. The threat was barely talked about earlier this summer.
The U.S. economy grew at a feeble 0.8 percent annual pace the first half of 2011, its slowest since the end of the Great Recession in June 2009. Manufacturing and consumer spending have slowed dramatically.
Oil prices plunged 6 percent to the lowest price of the year Monday — $81.31 a barrel. Investors predict a weakening economy means that consumers and businesses will buy less gasoline.
The turmoil in the U.S. markets was the end of a daylong rout that swept the world. Stocks lost 4 percent in South Korea and 2 percent in Japan, then 5 percent in Germany and 4 percent in France.
In the U.S., stocks fell even though Moody’s, another major credit rating agency, stood by its top rating of Aaa for the United States. It said it could downgrade the U.S. if it did not cut its deficit, “but it is early to conclude that such measures will not be forthcoming.”
Financial markets were not comforted by an afternoon statement by President Barack Obama, who said Washington needs more “common sense and compromise” to tame its debt.
“Markets will rise and fall,” he said. “But this is the United States of America. No matter what some agency may say, we’ve always been and always will be a triple-A country.”
Across the Atlantic, policymakers struggled to contain a debt crisis of their own. The threat of default has spread from relatively small countries like Greece and Portugal to bigger ones — Italy and Spain.
If those countries failed to meet their debt payments, Italian and Spanish banks would absorb losses on their holdings of their countries’ government bonds.
Then the pain could spread outward — to foreign banks that made loans to Spanish or Italian banks and beyond.
The European Central Bank stepped in Monday, buying billions of euros’ worth of Italian and Spanish bonds to drive down dangerously high interest rates. But the move does nothing to address the underlying problem: huge Italian and Spanish debts that could require a bailout and strain the resources of the European Union.