An avalanche of worry
World markets plunge on fears over US, European economies
Furious selling shook stock markets around the world yesterday as concerns about a ballooning European debt crisis and the specter of another US recession sent investors fleeing.
US stock markets plunged, sending the Dow Jones industrial average down 5.5 percent, a loss of more than 630 points - its biggest decline since December 2008, when the financial crisis was near its height. The sell-off continued last night in Asia, where markets opened sharply down.
Investors yesterday scrambled to invest in US Treasurys, seen as the safest option available. Sales rallied despite the US credit downgrade late Friday by Standard & Poor’s. Gold, just over $1,200 an ounce a year ago, soared to an all-time high of more than $1,700 a troy ounce.
President Obama tried to restore confidence in a midday speech addressing the credit rating downgrade, saying Congress will need to address tax reforms and entitlement programs in upcoming months to fix the political dysfunction contributing to a crisis in the stock market.
“Markets will rise and fall,’’ Obama said. “But this is the United States of America. No matter what some agency may say, we’ve always been and always will be a triple-A country.’’ His speech failed to stop the market slide.
Oil plunged by more than $5 a barrel in New York, closing below $82 a barrel for the first time since November and reflecting fears that a global slowdown would slash demand.
While the downgrade may have been a catalyst for the sell-off, analysts said the steep decline was driven by deeper concerns about the US and European debt, stalling economic growth, and the lack of options to jump-start the economy.
The Federal Reserve meets today in Washington to discuss possible actions.
When Standard & Poor’s officials last week dropped the government’s rating to AA+ from the top rating, AAA, they did so based on doubts that Congress and the president will be able to break political gridlock and make more serious reductions in the long-term debt. The agency was dissatisfied with the deal lawmakers reached last week just in time to prevent a government default.
Laurence J. Kotlikoff, an economics professor at Boston University, said spiraling markets appeared to be in a “coordinated panic’’ and that debt fears across Europe have been a constant reminder to American investors about the nation’s own economic fragility.
“Everybody has decided that everybody is panicking,’’ Kotlikoff said. “So everybody is screaming and getting up and running out of the theater.’’
Jay Bryson, global economist for Wells Fargo Securities, said jittery investors, already worried about another US recession, reached a tipping point with Friday’s news of the S&P downgrade.
“This is a hit to people’s confidence, an indication that perhaps the US has lost its way,’’ Bryson said. “We’ve been AAA-rated since 1941. The last few years have been difficult for people and something like this comes along once in a lifetime. Though it’s not catastrophic, people lose faith.’’
When that faith will return remains to be seen. The economy has grown slowly since the 2007-2009 recession, the longest since World War II. Many institutional and individual portfolios had only recently recovered from those losses.
Rick Nelson, chief investment officer at the Commonfund, a Wilton, Conn., group that oversees $26 billion for endowments and foundations of universities, hospitals, and museums, said the plunge in values “when a lot of funds were just starting to build back toward their longer term goals, is painful.’’
When endowment returns shrink, there is generally less money available to support the operations of the schools and other institutions. Nelson said many of these institutions are better prepared than in the last crisis, with more of a cash cushion set aside, but the declines could strain future spending.
Further, large institutions, such as Harvard University, could face increased borrowing costs if interest rates rise in the months ahead. Harvard announced in June, for example, plans to restart a stalled campus expansion on more than 30 acres in Allston.
“We are watching the situation closely, but generally we feel comfortable with our current cash position and debt portfolio structure,’’ Harvard University spokesman Kevin Galvin said in a statement yesterday.
While US Treasurys have remained attractive to investors throughout the recent tumult - helping drive US mortgage and other long-term rates lower - analysts expect interest rates to rise over the long term, exacting a higher cost on borrowers, including the federal government.
Individual investors are also feeling the pain. Robert J. Glovsky, president of Mintz Levin Financial Advisors LLC, which manages over a billion dollars in assets, said the firm has been fielding a steady stream of calls from worried investors.
“From our standpoint, we encourage them to be patient and ride this stuff out,’’ he said. “Any time you have a market reaction to debt or deficit reduction, it all tends to be temporary and based on raw emotion.’’
Chris Chandonait, a 40-year-old insurance programmer from Dighton, said the economic turmoil of the last few weeks will probably delay the early retirement he has been working toward: touring the country with his wife in their camping trailer. Though he would like to retire in 2018, he said he doesn’t think his 401(k) and IRA balances will recover by then.
“They’d have to have banner years for me to hit that date, and I don’t see that happening,’’ Chandonait said. “I’m down $10,000 this year already - and that’s not including today’s drop.’’
Chandonait said that has him wondering if he should keep adding to his IRA or put the money toward home improvements that could help lower his family’s utility bills.
“Maybe I can change my heating system to reduce my costs or something,’’ he said, “because I can’t count on the stock market.’’
Erin Ailworth, Beth Healy, and Todd Wallack of the Globe staff contributed to this report. Megan Woolhouse can be reached at email@example.com.