Stocks sink after S&P downgrades US outlook

Standard and Poor's cut its outlook for long-term US credit on Monday, sending US stocks downward

Henny Ray Abrams / AP
Geoffrey Freeman of Barclays Capital works on the floor of the New York Stock Exchange, Monday, April 18, 2011, in New York. Stocks are sharply lower after Standard & Poor's issued a warning on US government debt. Fears about Europe's debt problems are also pushing markets lower.

By Abby Schultz,

Stocks closed down more than 1 percent, although well off the lows of the session, in the wake of news that Standard & Poor's downgraded its outlook on the long-term sovereign debt of the United States to "negative."

The Dow Jones Industrial Average fell about 140 points to about 12,201.59, after ending last week slightly lower. The blue-chip index fell 247 points at one point during the session.

Most Dow components sank, led by Bank of America, Caterpillar, and was the only stock to gain.

The S&P 500 fell to 1,305, after trading below 1,300 earlier, while the Nasdaq also sank. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose about 11 percent to nearly 17, after trading well above 18 earlier in the session.

All key S&P 500 sectors fell, led by energy and financials.

It may be wrong to read too much into the market reaction to S&P's decision to downgrade the outlook for U.S. long-term debt as it came during a week marked by both the Passover and Easter holidays. As a result, many market participants are away, leaving trading desks thinly staffed. In the final hour of trading Monday, less than 800 million shares had traded hands on the NYSE floor.

Given the amount of high frequency trading that dominates the market, "were there that many sellers," asks Joe Greco of Meridian Equity Partners. "No," he answered. But there also "weren’t many buyers out there to support the market," Greco said.

During a fully staffed session, the market could have fallen more, he said.

But, S&P's message, that U.S. finances are in dire shape, is not news to many investors and traders. Greco noted that Pimco, the world's largest bond fund, stepped away from US government debt back in March.

"Savvy money managers have already positioned themselves for potential negative ratings news, or negative ratings period," Greco said.

The downdraft in the market, and the spike in volatility, are not surprising given S&P's downgrade of its outlook for U.S. debt, and the fact a number of key earnings reports from financial and tech companies, among others, are due out this week, said J.J. Kinahan, chief derivatives strategist at TD Ameritrade.

Also, he noted, while the market has fallen, the S&P 500 is still trading above 1,275, the low end of a range that the market has sustained for awhile.

"There's no reason to hit the panic button yet," Kinahan said, adding, "It's natural that the volatility would increase."

Treasurys surprisingly ended the session higher despite S&P's rating action.

Meanwhile, oil prices dropped after a lack of buyers for crude prompted Saudia Arabia to cut its output. London Brent fell 1.5 percent to $121.61 a barrel, while U.S. light crude fell 2.3 percent to close at $107.12.

Gold prices surged to a new record, closing at $1,493.30, after news of the downgrade in the U.S.'s long-term debt rating. Silver also closed at a new 31-year-old high of $42.96.

The dollar however, was up slightly in part because of pressure on the euro amid concerns that Greece will need to restructure its debt and continuing uncertainty over Portugal's financial health.

In earnings news Monday, Citigroup posted a profit of 10 cents per share, a penny ahead of estimates, but net income fell, and the bank said it continues to struggle in terms of growth.

Elsewhere in earnings, Eli Lilly reported profit of 95 cents a share, beating analyst estimates and sending shares of the Illinois drugmaker up. And Halliburton also reported sharply higher earnings on increased activity in North American oil fields that offset Middle East unrest.

Texas Instruments will report earnings after the market closes, while Goldman Sachs and Johnson & Johnson release results before the market opens on Tuesday.

Earnings expectations softened last week as Bank of America and Google kicked off the earnings season with worse than expected results.

Healthcare stocks were in the spotlight after Swiss medical device maker Synthes confirmed it is in merger talks with Johnson & Johnson in a deal which could be worth $20 billion.

Gap fell sharply in pre-market trading after news Goldman Sachs downgraded the retailer to "sell" from "neutral," saying their large size represents a "structural hurdle." Bank of America Merrill Lynch downgraded Gap to "neutral" from "buy."

Boeing traded flat to slightly higher after news it received approvals from regulators in several countries to begin training commercial pilots for its 787 Dreamliner.

Molycorp gained after news the rare earth producer bought Santoku America of Arizona, which makes rare earth metals and alloys.

In economic news, the National Association of Home Builders said its index of homebuilder sentiment fell to 16 in April from 17 in March as homebuilders reported the spring season was off to a slow start.

Elsewhere, China boosted its requirements for bank reserves to 20 percent to stem inflation.

In Europe, Greece tried to fend off accusations that it would need to restructure its debts but failed to convince investors. Bank stocks such as Societe Generale and BBVA fell on continued concern about Greek debt.

S&P affirmed the U.S.'s triple-A rating, but put the U.S.'s long-term debt on "negative" watch from "stable."

The revised outlook reflects the "very large budget deficits and rising government indebtedness" of the U.S. relative to its triple-A peers, S&P said in a press release. "The path to addressing these is not clear to us," the rating agency said.

In response, Assistant Secretary for Financial Markets Mary Miller of the U.S. Department of the Treasury noted that S&P emphasized "the importance of timely bipartisan cooperation and action on fiscal reform."

And, Miller said in a press release, Moody’s, a second rating agency, said that: ''we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government."

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