Stock prices of the dozen largest public companies in the Indianapolis area all tumbled Monday morning as a Standard & Poor’s downgrade of U.S. debt spooked investors worldwide.
Meanwhile, investors poured money into U.S. bonds in spite of the Friday night downgrade, as investors concluded they are still the safest investment in turbulent times.
“The very investment that was downgraded is having a huge rally right now, while stocks are getting beat up right now,” said George Farra, a principal at Indianapolis-based firm Woodley Farra Manion Portfolio Management.
Farra said he got fewer than 10 client inquiries about how to respond to the S&P downgrade. He said client concerns were bigger in July leading up to the Aug. 2 deal in Congress to cut the U.S. federal budget in exchange for raising its debt ceiling.
But in recognition that stock markets are in their worst decline since the aftermath of the Lehman Brothers collapse in September 2008, Farra took “defensive measures” by selling stocks and putting the cash in money market accounts.
Those kinds of decisions continued to hammer stocks Monday morning. By 10:30 a.m., local retailer HHGregg Inc. had suffered a 9.3-percent decline in its stock price. Carmel-based ITT Educational Services Inc. shed 6 percent of its stock value. Even Columbus-based Cummins Inc.—which has been enjoying phenomenal growth in China and other world markets—lost 5.8 percent in value.
You know something is off, Farra said, “When you see people selling Cummins Engine. Their fundamentals are phenomenal.”
Among other local companies, shares of Eli Lilly and Co. fell 2 percent; shares of WellPoint Inc., Simon Property Group and The Finish Line Inc. all dropped about 3.5 percent; and Brightpoint Inc., CNO Financial Group Inc. and Duke Realty Corp. all lost more than 5 percent.
The Dow Jones industrial average fell more than 250 points minutes after the opening bell on Wall Street. It recovered some of those losses, then fell again and was down 295 points in mid-morning trading.
Stock markets in Asia began the global rout. The main stock index fell almost 4 percent in South Korea and more than 2 percent in Japan. European markets opened later and fell, too, with Germany down 3 percent and France 2.5 percent.
It was the first chance for global investors to respond to S&P's announcement late Friday that it was reducing its credit rating for long-term U.S. government debt by one notch, from AAA, the highest rating, to AA+.
The move wasn't a total surprise but came when investors were already feeling nervous about a weak U.S. economy, European debt problems and Japan's recovery from its March earthquake.
In other early trading on Wall Street, the S&P 500 index fell 36 points, or 3 percent, to 1,163. The Nasdaq composite index fell 84 points, or 3.3 percent, to 2,449. The Dow was at 11,146, down 2.6 percent.
Fresh memories of the financial crisis three years ago are also driving investors away from risky investments and into what's considered safer.
"Fear of a repeat of 2008 is what's really driving investments," said Gary Schlossberg, senior economist with Wells Capital Management.
Gold, which investors traditionally buy when they want a safe investment, rose above $1,700 per ounce for the first time Monday. Its price remains below its 1980 record after adjusting for inflation.
Prices for U.S. government debt rose — even after S&P essentially said they were a riskier investment than the debt of some other major world economies — because Treasurys are still seen as one of the world's few safe havens. Prices rise as demand increases.
The yield on the 10-year Treasury note fell much of the morning, to 2.40 percent from 2.57 percent late Friday. A bond's yield drops when its price rises.
Where Treasury prices finish the day will be more important than where they are at the start, Bill O'Donnell, head of U.S. Treasury strategy at RBS Securities, wrote in a report.
"We will learn more about the future path of Treasury prices at today's close than we will by the open," he said. "I want to see how the market clears and how it synthesizes the cacophony of news of late."
Investors are worried that Spain or Italy could become the next European country to be unable to pay its debt. The European Central Bank said it will buy Italian and Spanish bonds in hopes of helping the countries avert a possible default.
Seeking to avert panic spreading across financial markets, the finance ministers and central bankers of the Group of 20 industrial and developing nations issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.
"We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets," they said.
Crude oil, natural gas and other commodities fell on worries that a weaker global economy will mean less demand. Oil fell $2.84 to $84.04 per barrel.
Last week, the Dow Jones industrial average fell almost 700 points. That was its biggest point loss since October 2008, during the financial crisis. The Dow has dropped in nine of the last 11 trading days.
Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected.
The economy grew at a 1.3-percent annual rate from April through June, below economists' expectations. It expanded at just a 0.4-percent rate in the first quarter. The first half of 2011 was the slowest since the end of the recession.
Then reports showed that the manufacturing and services industries barely grew in July. Job growth was better than economists expected last month. But the 117,000 jobs created in July were still well below the 215,000 that employers added between February and April, on average.
The Federal Reserve will meet on Tuesday, but economists don't expect much to come out of the meeting. The central bank's key interest rate is already at a record of nearly zero, where it has been since 2008. The Fed has also already said that it plans to keep rates low for "an extended period."
The central bank finished a $600 billion program in June to buy Treasurys in hopes of supporting the economy. Chairman Ben Bernanke said last month that the Fed would step in to help the economy if it further weakened. But some Fed policymakers oppose more bond purchases, saying it could lead to higher inflation.
Fears about a weaker U.S. economy have overshadowed profit growth businesses have reported. Earnings rose 12 percent in the second quarter from a year earlier for the 441 companies in the S&P 500 that have already reported. Revenue growth has also topped 10 percent for the first time in a year.