Apr 27, 2010 4:17 PM by Bea Karnes, News First 5
U.S. stocks followed European markets sharply lower Tuesday after Standard & Poor's downgraded the debt of Greece and Portugal. The rating agency's move intensified investors' fears that Europe's debt problems are spreading.
The Dow Jones industrial average ended trading down more than 200 points. All the major market indexes were down more than 2 percent.
The ratings downgrades sent the dollar up more than 1.1 percent against the euro, hitting its highest level in about a year. At the same time, gold and Treasury prices also rose as investors sought safer investments. The three often do not trade in the same direction.
"It was a knee-jerk reaction," said Brian Peardon, a wealth adviser at Harrison Financial Group in Citrus Heights, Calif. Peardon said the small size of Greece and Portugal's economies mean their debt struggles are not yet a major problem. But if they were to default on their debt, other countries that hold their bonds would also suffer.
Debt-strapped countries would also likely find it harder to spend more to stimulate their economies and help feed the global economic recovery.
Standard & Poor's downgraded Greece's debt to junk status and lowered Portugal's debt two notches to A-minus from A-plus. Greece has already admitted it can't pay debts coming due shortly and it has asked for a bailout from European neighbors and the International Monetary Fund. And there are growing concerns about Portugal's ability to handle its debts.
Investors have been on edge for months about Greece's fiscal crisis even as they've sent stocks higher on signs of an improving U.S. economy. They have also been worried that Portugal could be the next weak European economy to require help. That has undermined confidence in Europe's shared currency, the euro.
"This is a major test case for the euro," said Quincy Krosby, a market strategist with Prudential Financial. The European Union "needs a viable template on how to deal with these issues," Krosby added, noting that troubles extend beyond just Greece.
Tuesday's downgrades overshadowed the latest series of upbeat earnings reports from U.S. companies including 3M and Dupont.
A setback in the European economic recovery "sends a U.S. recovery back and spreads to emerging markets," said Eric Thorne, an investment adviser at Bryn Mawr Trust Wealth Management in Bryn Mawr, Pa.
The debt problems have the potential "to have devastating effects," Thorne said. Thorne noted, however, he doesn't yet predict a worst-case scenario that would put a global recovery completely on hold.
Greece agreed last week to tap a rescue package from the 15 other countries that use the euro and the International Monetary Fund. However, there are now worries that Greece won't have access to the money before it is forced to make a big debt repayment on May 19.
The downgrades drew some of the market's attention away from testimony by Goldman Sachs CEO Lloyd Blankfein and other top executives from the bank on Capitol Hill. The executives were testifying about the company's dealings in mortgage-backed securities during the credit crisis.
The Securities and Exchange Commission has charged Goldman with civil fraud, accusing it of misleading investors about investments tied to subprime mortgages.
Goldman was actually one of the relatively few winning stocks Tuesday. Analysts said investors were reassured by the fact there were few new details in the testimony. The stock rose $1.81 to $153.84.
According to preliminary calculations, the Dow Jones industrial average fell 213.04, or 1.90 percent, to 10,991.99. The Standard & Poor's 500 index fell 28.34, or 2.34 percent, to 1,183.71, while the Nasdaq composite index dropped 51.48, or 2.04 percent, to 2,471.47.
Portugal's main stock index dropped 5.4 percent, while Greece's plummeted 6 percent. Britain's FTSE 100 fell 2.6 percent, Germany's DAX index dropped 2.7 percent, and France's CAC-40 tumbled 2.8 percent.
The Chicago Board Options Exchange's Volatility Index, which is known as the market's fear gauge, surged 19.3 percent. It often jumps when investors become rattled and a pullback takes hold.
Stocks fell slightly in early trading as reports of strong earnings and growing consumer confidence helped offset the European debt worries.
Dow components 3M Co. and Dupont Co. both reported better-than-expected first-quarter profits. The pair also boosted their earnings outlooks for the year based on improving sales and a rebounding economy.
3M shares rose $1.21 to $88.65, while DuPont dropped $1.08, or 2.6 percent, to $39.87.
The Conference Board's consumer confidence index jumped to 57.9 in April. Economists polled by Thomson Reuters had forecast it would rise to 53.5.
Tommy Williams, president of Williams Financial Advisors in Shreveport, La., said consumers are starting to feel wealthy again, especially as the stock market has risen sharply in recent months. Consumers also appear to have money to go out and spend, which should further help a recovery.
"The cash is there to be invested or spent," Williams said.
Investors are also keeping an eye on Washington this week.
The Federal Reserve began a two-day, rate-setting meeting. The Fed has said it plans to keep rates at historic lows for an extended time to help the recovery. However, eventually rates will need to climb to fight inflation as the economic rebound continues. Investors are hoping the Fed will hold off on raising rates for some time.
Williams noted that any change in the language of the Fed's statement Wednesday about when it might raise rates could cause a 5 percent to 10 percent pullback in stocks.
Many analysts, noting that the market has been going up almost relentlessly the past two months, have said stocks were due for a pullback. Besides the concerns about Europe, investors are uneasy about debate in Congress on an overhaul of financial regulations. However, it's unclear when a Senate floor debate on the legislation will begin.