Wall Street stocks plummeted on Monday as skittish investors, already concerned about the economy, struggled to work out the implications of an unprecedented downgrade of the United States government’s credit rating, and sought safer places to put their money.
The declines, coming in the first opportunity for investors to sell since Standard & Poor’s cut its rating on the nation’s long-term debt late Friday, followed losses in global markets and set United States equities on track to extend losses that for some recalled the days of the 2008 financial crisis. They also reflected anxiety over the United States economy and Europe’s debt woes.
At the close of trading, the Standard & Poor’s 500-stock index was off more than 6 percent, coming after a 7 percent loss over the course of last week. The Dow Jones industrial average showed a one-day decline of more than 600 points, its steepest point loss in a single day since December 2008. The Nasdaq dropped nearly 7 percent.
The benchmark 10-year Treasury yield fell to 2.35 percent, the lowest since January 2009. The yield was 2.56 percent on Friday.
Following a dismal opening in the wake of lower European and Asian markets, stocks took a sharper turn downward as Standard & Poor’s announced additional downgrades, including cuts to the debt ratings of the housing giants Fannie Mae and Freddie Mac.
S.& P. had warned investors earlier this year that it would act if Congress did not agree to increase the government’s debt ceiling, basically a borrowing limit, and adopt a long-term plan for reducing its debts by at least $4 trillion over the next decade. So analysts were asking why the market was acting surprised on Monday. They suggested that a rash of bad economic news, coupled with the debt ceiling talks over the past weeks and then the nation’s first-ever downgrade, had ganged up and bullied the markets.
“Fear is rampant in the market right now, the fear that we will have a double dip recession,” said Brian M. Youngberg, the energy analyst for Edward Jones. “It is too early to call that, but once the fear bubbles up it can treat the market very harshly.”
Tom Porcelli, chief United States economist for RBC Capital Markets, called the actual downgrade a “non-event,” adding: “For the most part we have been working under the assumption that S.&P. was going to do this.”
Investors were “trying to get their head around what it means from a macro perspective,” Mr. Porcelli said. “It is less profound than some people think.”
Financial stocks in particular were hammered, falling as much as 10 percent in afternoon trading.
Those stocks were reacting to the European debt problems as well as the downgrade news, said Jason Arnold, an analyst with RBC Capital Markets. But there were also underlying economic problems weighing on the sector, including those related to mortgage repurchase issues.
“For those that have sizeable mortgage repurchase liability exposure, the market is concerned about that as well,” said Mr. Arnold.
Mr. Arnold specifically mentioned American International Group’s lawsuit against Bank of America over hundreds of mortgage-backed securities in what could be the largest such action by a single investor.
Bank of America was down about 18 percent, and Citigroup was down more than 16 percent.
Another analyst noted that the market performance in recent weeks was bringing back echoes of the last financial crisis. “The rapidity of the decline and its force now rivals almost anything we’ve seen in the post-war era,” said Dan Greenhaus, the chief global strategist for BTIG, a financial services firm. “We have fallen so far and so quickly that we are up there with the most vicious sell-offs.”
Fears of a slowdown in the economy also hit energy stocks.
The downgrade of the United States long-term debt to AA+ from AAA has global implications, said Alessandro Giansanti, a credit market strategist at ING in Amsterdam.
“We can see that this may force the U.S. to move more aggressively to cut spending,” he said, something that could drive the already weak economy into recession and weigh on the economies of all of its trading partners. “That’s the main driver” of the stock market declines, he said.
Since two ratings companies merged in 1941 to form Standard & Poor’s, the agency had always given the United States an AAA rating, until Friday. But other agencies, including Moody’s and Fitch, have stuck with their ratings. On Monday, Moody’s released a report discussing the decision, saying the United States has “unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments.”
President Obama said on Monday that the country needs a long-term approach to deficit reduction, but that the markets “continue to believe our credit status is triple-A.”
“That doesn’t mean we don’t have a problem,” he added in a televised speech.
The tension in the markets was palpable on Monday. Doreen Mogavero, a trader at the New York Stock Exchange, said traders had canceled vacations, and the exchange operator brought in extra staff to make sure the systems were working properly, as it anticipated a surge in volumes.
Ms. Mogavero said traders were closely watching the VIX index, a measure of volatility. As she spoke, it was up more than 3 points, to around 36 — double the level it was just a few weeks ago. By 2 p.m., it was around 40.
Investors were moving into bonds and gold, which topped $1,700 an ounce for the first time. The dollar continued to weaken against most major currencies.
Guy LeBas, chief fixed-income strategist for Janney Montgomery Scott, said higher prices for bonds were “a testament to the fact that global investors view U.S. bonds as the safe-haven asset choice.”
Some investors are turning their attention to a meeting of the Federal Reserve this week and whether there will be any new measures to stimulate the economy.
Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan & Company, said the Federal Open Markets Committee was not likely to take action on interest rates, but would most likely discuss what policies would give support to the market.
“The rest of the conversations should happen in Washington,” Mr. Giddis said in a research note. “This country has an economic problem, which can only be fixed with jobs, not governmental liquidity, and that is the one that worries me the most.”
The interest rates on Spanish and Italian bonds plummeted after the European Central Bank expanded its purchases of government debt to support those countries for the first time. The yield on 10-year Spanish bonds dropped by 88 basis points, while comparable Italian yields fell 80 basis points. News agencies cited traders saying the central bank was intervening in the secondary market to buy the securities.
The European Central Bank declined to comment Monday. But in a statement issued late Sunday after an emergency conference call, the bank said it would “actively implement” its bond-buying program to address “dysfunctional market segments.” It did not specify which bonds it would buy, but hinted it would be Spain and Italy by welcoming their efforts to restructure their economies and cut spending.
Previously the bond buying had been limited to bonds from Greece, Portugal and Ireland — the three euro-zone countries that have already received international bailouts. Fears that the bloc’s sovereign debt crisis would spread to the much bigger economies of Italy and Spain had contributed greatly to recent market losses.
European equities opened higher, but the rally fizzled, dashing hopes that the E.C.B.’s actions would be enough to soothe broader market jitters.
The Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 3.72 percent, while the FTSE 100 index in London fell 3.39 percent.
In Asia, the Tokyo benchmark Nikkei 225 stock average fell 2.2 percent. In Hong Kong, the Hang Seng index fell 2.2 percent, and in Shanghai the composite index closed 3.8 percent lower.
United States crude oil futures for September delivery fell 4.2 percent to $83.21 a barrel.