Stocks Suffer Sharpest Drop Since 2008

The stock market resumed its free fall Monday on mounting fears about the stalling economy and worries that the government had few options to increase growth, dual concerns that overshadowed the downgrade of long-term United States government debt.

The Dow Jones industrial average fell 634 points, or 5.6 percent, and the Standard & Poor’s 500 -stock index dropped 6.7 percent, the biggest retreats since December 2008 in the midst of the financial crisis, accelerating a sell-off that began a couple of weeks ago. The S.& P. 500 is now down 18 percent from its April 29 peak and is nearing official bear market territory, defined as a fall of 20 percent.

So anxious are many investors that they poured money intoTreasury securities, the debt the government sells to finance its operations. Even though the ratings agency Standard & Poor’s downgraded United States debt a notch from the sterling AAA rating on Friday, judging them a slightly higher risk than before, many still deem Treasuries to be safer than just about any other investment.

Typically, a downgrade would cause investors to sell, but financial turmoil in Europe and policy gridlock in Washington overrode concerns about the downgrade. “This is investors running from risk wherever they see it,” said David Kelly, chief market strategist at JPMorgan Funds. “The biggest risk we face here is recession.”

The stock sell-off picked up speed even though President Obama sought to calm markets, telling reporters that “our problems are eminently solvable and we know what we need to do to solve them.” However, there is sharp disagreement how to solve them, as demonstrated by the fiercely partisan battle over raising the federal government’s borrowing limit, which was resolved only through a last-minute compromise.

In the wake of the financial collapse more than two years ago, the government took various steps to invigorate the economy, pouring money into the financial system and adopting stimulus spending. Some economists say they think more stimulus spending is needed now to keep the economy from slowing further, but this seems unlikely given that many Republicans say the country can ill afford to add to the gaping budget deficit with more spending.

It was not just the stock market that was rattled. A few obscure but important parts of the credit market also showed signs of some stress. For example, the market for commercial paper, short-term loans that companies use to finance themselves, became less favorable. This was not nearly as bad as during the financial crisis but people will be keeping an eye on this to see if conditions deteriorate.

“The cause of all this was the marking down of growth expectations,” said Barry Knapp, strategist at Barclays Capital. “It has morphed into one giant global growth recession concern.”

The trading day opened ominously in the United States, after sharp drops of stocks in Asia and in Europe. The European Central Bank sought to calm investors by intervening aggressively in bond markets with special measures to help support financially troubled Spain and Italy, to little avail.

On the floor of the New York Stock Exchange, Doreen Mogavero, a trader for Mogavero, Lee & Company, noted that other traders had canceled vacations in anticipation of a wild day. Extra staff was on duty to make sure the computer systems were working properly as volumes surged.

The exchange processed a record 390 million orders in the first hour of trading, eclipsing the last record in May 2010. All told, 18 billion shares trades on the nation’s stock market, the most active day in a year.

Many investors — burned by the relentless decline of stocks in the months after the 2008 financial collapse — seem inclined to sell rather than wait. “It is the psychological impact that I am concerned about in terms of confidence on the market,” said Ms. Mogavero.

The force of the stock market sell-off that has accelerated over the last two weeks — the broader S.& P. 500-stock index has lost 16.8 percent since July 22 — is creating the growing sense that the economy may be nearing a double-dip recession as everyone from consumers to businesses retrench.

The biggest declines were in bank stocks. Bank of America fell 20 percent. Citigroup fell 16 percent. Morgan Stanley dropped 14 percent. JPMorgan fell 9 percent. And Goldman Sachs fell 6 percent.

Investors feared that banks could be hit by the economic slowdown and that, with government spending constrained, lenders would be less likely to receive official support in the future should they need it, as they did during the financial crisis.

New York Times

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