Back about a year ago I mused as to when and what would cause the double dip (next stock crash) and here it is.
2008 all over again? Stocks in free fall
U.S. credit downgrade sends investors stampeding out of equities; large caps down 5.6%; Dow sheds more than 500 points
August 8, 2011 11:04 am ET
U.S. stocks tumbled, giving the Standard & Poor's 500 Index its biggest decline 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 2.2 percent and 7.8 percent. Ford Motor Co. and Caterpillar Inc. slumped at least 7.4 percent, pacing losses in stocks most-tied to the economy. Bank of America Corp. tumbled 16 percent to lead financial shares in the S&P 500 down 7.7 percent. Chevron Corp. fell 5.1 percent as oil sank to an eight-month low. Newmont Mining Corp. rallied 3 percent after gold climbed to a record.
The S&P 500 retreated 5.6 percent to 1,132.32 at 2:18 p.m. in New York. The gauge slumped 12 percent in three days, the most since November 2008, and fell to the lowest since September 2010, on a closing basis. The Dow Jones Industrial Average slid more than 500 points. The Russell 2000 Index of small companies slumped 6.5 percent, entering a so- called bear market, down 23 percent from its April 29 high.
“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.”
The downgrade extended a rout that had wiped out $1.94 trillion in market value from the country's stocks amid concern the economic recovery is at risk. Global equities tumbled and European shares entered a so-called bear market. The Stoxx Europe 600 Index has now fallen 21 percent from this year's high on Feb. 17. The S&P 500 has fallen 17 percent since April 29.
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 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.
Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., increased holdings of Treasuries to 10 percent from 8 percent and cut cash holdings to 15 percent from 29 percent.
“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,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, said in a telephone interview. His firm oversees more than $38 billion.
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.”
The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 32 percent to 42.18, the highest since May 2010, on a closing basis.
The Morgan Stanley Cyclical Index of 30 stocks tumbled 6.7 percent. The Dow Jones Transportation Average, which is also a proxy for the economy, retreated 5.3 percent. Ford sank 7.4 percent to $10.04. Caterpillar decreased 7.6 percent to $84.08.
The KBW Bank Index of 24 stocks slumped 8.6 percent. Bank of America dropped 16 percent, the most in the Dow, to $6.85. American International Group Inc., the bailed-out insurer, sued the largest U.S. lender by assets, over $10 billion in losses on mortgage-bond investments.
“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.”
Berkshire Hathaway Inc. Class B shares slumped 2.5 percent to $69.44. Warren Buffett's Omaha, Nebraska-based company is among firms that may be downgraded by S&P as the ratings company reviews insurers after stripping the U.S. government of its AAA rating.
“Our view of these companies' fundamental credit characteristics has not changed,” S&P said in a statement today as it cut the outlook to “negative” on Omaha, Nebraska-based Berkshire. “Rather, the rating actions reflect the application of criteria and our view that the link between the ratings on these entities and the sovereign credit ratings on the U.S. could lead to a decline in the insurers' financial strength.”
Buffett lost his AAA rating from S&P last year after agreeing to buy railroad Burlington Northern Santa Fe. He said Aug. 6 that the ratings firm erred in cutting the U.S. grade and that the country should have a “quadruple A” rating. Buffett didn't immediately respond to a request for a comment.
Newmont Mining Rallies
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. Chevron decreased 5.1 percent to $92.61. Newmont Mining rallied 3 percent to $56.02.
Only two other stocks in the S&P 500 advanced. O'Reilly Automotive Inc., an auto-parts retailer, gained 0.4 percent to $58.56. Procter & Gamble Co., the world's largest consumer- products company, rose 0.1 percent to $60.65.
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.
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.”