Investors fled stocks on Monday in the first session since Standard & Poor's cut the AAA credit rating of the United States, adding to worry about the economic outlook and Washington's ability to meet the challenges. The losses on Monday followed Wall Street's worst week in more than two years on concerns about flagging economic growth and fears of a financial meltdown in the eurozone.
Market sectors most sensitive to the economy, such as banking and commodities, were among the hardest hit, with the S&P materials index dropping 3.7 percent and the KBW Bank index slumping 4.7 percent. Among individual stocks, United States Steel Corp slumped 8.1 percent to $30.50, while Bank of America Corp dropped 15.4 percent to $6.91.
"It's about the underlying fundamentals and issues that are embodied in the downgrade itself. The market is really focusing on long-term sustainable growth issues and that is why you have the market taking it on the chin," said Jonathan Golub, chief US equity strategist at UBS in New York. The Dow Jones industrial average dropped 271.06 points, or 2.37 percent, to 11,173.55. The Standard & Poor's 500 Index slid 36.21 points, or 3.02 percent, to 1,163.17. The Nasdaq Composite Index lost 79.59 points, or 3.14 percent, to 2,452.82.
S&P cut the US long-term credit rating by a notch to AA-plus late Friday on concerns about debt levels in the world's largest economy. The downgrade could eventually raise borrowing costs for the US government, companies, as well as consumers. Even the European Central Bank's dramatic intervention in bond markets, which pushed down yields on Spanish and Italian bonds, was not enough to stem selling.
But some analysts noted the mass selling has made some stocks attractive at lower prices. "It's baby out with the bathwater, the world is coming to an end - and I'm seeing stocks with tremendous yields now," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco. The CBOE Volatility Index, Wall Street's "fear gauge," jumped 18.6 percent and topped 40 for the first time since May 2010. Declining stocks outnumbered advancing issues on the New York Stock Exchange by more than 25 to 1, while on the Nasdaq, decliners beat advancers nearly 8 to 1.