Add S&P downgrade to a struggling economy, what do you get? Stocks in shock. [VIDEO]
Stocks plummeted Monday, in response to the S&P's decision Friday evening to downgrade the US debt rating from AAA to AA+.
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The soft economic data, combined with the falling stock market, increases the probability the US will slip into a recession, say some economists. Last week, for example, Standard & Poor’s estimated the odds had increased to 35 percent that the US would enter a recession, up from 30 percent.Skip to next paragraph
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The US and global economy “are in a feeble ‘rehab’ recovery,” which has been hurt by surging oil prices, the Japan disruption, and the debt crisis in Europe and the US, wrote Bank of America economist Ethan Harris in an analysis on Monday.
Downgrading the US government debt may be the "straw that breaks the camel's back,” said Mr. Harris.
Monday's market unease comes a day before the Federal Reserve meets for its monthly meeting to set short-term interest rates. Although interest rates are already low, some investors suggest thata the Fed may make an effort to calm the financial markets.
“I think they will do something that effectively eases long-term interest rates,” says Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston. “The question is, how far do you go right now?”
While the stock market sank, the price of gold surged to more than $1,700 an ounce, up over $60 Monday morning, as investors ran for shelter. “The cost of anything safe is going higher and higher,” says Mr. Stein.
The bond market had very little reaction to the S&P downgrade since many traders had expected the action.
Instead, the bulk of the negative reaction was on Wall Street.