Dow Jones Suffers Big Drop After S&P Downgrades U.S. Credit Rating

Update: The Dow Jones closed at 12,201.59, dropping 140.25 points for the day (1.14 percent).

On Monday, stocks took a big hit after credit-rating agency Standard & Poor's downgraded the longterm outlook the U.S.'s previously-stable AAA credit rating to negative, citing a lack of faith in the country to address widening budget deficits.

The Dow Jones is currently down by 1.76 percent (217.66 points) to 12,124.17.

"Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating," S&P said in a press release.

This is the first time S&P has downgraded the U.S. debt rating, according to CNBC, who also noted that America was briefly on Moody's "negative watch" in January 1996, when Republicans fought against raising the debt ceiling.

Gary Jenkins of Evolution securities says this should be a wake-up call for the U.S. government.

"It is not really a shock that one of the agencies have decided to slightly weaken the overall rating category of the US," said Jenkins, according to the Guardian. "[B]ut what is a surprise is that the agency makes no comment regarding the upcoming requirement to raise the debt ceiling, which if delayed could well lead to a watchlisting in our opinion[.]"

Regardless of the debt limit not being directly addressed in S&P's release, Austan Goolsbee, chairman of the White House Council of Economic Advisers, went on on Bloomberg television to defend the federal government's ability to raise the quickly-approaching debt ceiling, saying it was already "quite clear" the issue would be resolved.

Apart from the political implications, though, this credit downgrade could spell bad news for business around the globe. "A downgrade by S&P is the first step in a series of steps that could have catastrophic effects of the cost of doing business domestically and globally," Peter Kenny, managing director at Knight Capital Group, told Fox Business.

Not everyone, however, believes the S&P's downgrade deserves the attention it has received. The news led The Big Picture's Barry Ritholtz, for one, to ask, "Who Cares?"

"Its not that I disagree with their assessment -- I do not -- but I pay it little heed," Ritholtz said. "If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them."

Below is a graph of the Dow Jones drop, according to Google Finance:

Comments

[Peanut Santiago]

03:12 AM on 04/19/2011

The Senate "yells" at the credit rating companies.......AND.......surprise, surprise......American credit gets downgraded by S&P.

It is all in the timing.

We ordinary people can NOT do a darned thing (besides vote in elections).
WE are in for a rough ride.

[lunacougar]

02:25 AM on 04/19/2011

The only thing that S&P execs should be rating right now is the size of their cells.

[jcaunter]

05:20 AM on 04/19/2011

Why do you say that?

[lunacougar]

06:01 AM on 04/19/2011

Why do you feel the need to ask? Who's junkey overblown ratings caused this mess?

[George Hanshaw]

01:30 AM on 04/19/2011

The Bond Vigilantes are about to dramatically increase the cost of our debt service:

NEW YORK (Dow Jones)--The cost to insure U.S. sovereign debt from default rocketed 16% Monday and Treasurys briefly swooned after Standard & Poor's revised its outlook on the nation's AAA credit rating to negative from stable, citing budgeting issues.

Insurance sold in the form of derivatives called credit default swaps were quoted around 50 basis points, or 50,000 euros ($71,000) a year to insure 10 million euros ($14.2 million) of the Treasury bonds over five years, according to data provider Markit, up from 43 basis points before S&P's announcement.

While that is the weakest trading level since Jan. 31, 2011, the all-time worst performance for five-year credit default swaps, or CDSs, on U.S. debt occurred on March 6, 2009, when the cost of five-year protection rose to 100.3 basis points.

"The perilous state of the U.S. government finances is well known, and it was perhaps inevitable that one of the [rating] agencies would eventually take negative action," said Gavan Nolan, director in credit research at Markit in London, in a note.

CDSs in the U.S. have mostly traded around 40 basis points since the credit crisis, but have risen 35% since April 6 as concerns spread about the government's ability to agree on a debt-reduction plan.

[GhostOfFDR]

11:37 PM on 04/18/2011

This should be on the front page. Standard and Poors, a corporation that along with its "rating agency" cohorts rated trillions of dollars of worthless mortgage backed securities in the AAA category, and directly and indirectly caused several trillion dollars of our national debt has decided to make threats. Are the executives there not enjoying their freedom?

[Dani321]

12:37 AM on 04/19/2011

I agree! Why wasn't this on the front page? I had to go looking for it in this corner of HuffPo. What is going on with this site? Davenport went from admittingsending a racist email to "allegedly" sending a racist email on the front page. AOL'ing us?

This is a very big story, but just checking in on breaking stories on HuffPo, one would be clueless to this event.

They are threatening, aren't they? The cleared their throats and the market took a hit. Kind of a cocky move, huh? Being as none of them are behind bars, yet.

[Peanut Santiago]

03:13 AM on 04/19/2011

The oligarchs own and run the media.

WE are lucky we saw this anywhere.

And most people will probably not see it.

[jcaunter]

05:22 AM on 04/19/2011

I saw it on zerohedge.com almost as soon as it happened. Anyone who still gets their news from the MSM doesn't deserve to know what's going on anyway.

[klinzboy]

11:01 PM on 04/18/2011

Conservative politicians are being duplicitous as usual. It is a fact of political life that the Federal Budget cannot be brought out of the red without tax increases not maker how many cuts are made. Balancing the budget is not an important goal for conservative politicians and never has been in spite of their claims. Conservative politicians have one goal and that goal is to destroy effective government that serves the people and to establish a government that serves profiteering.

[CanadjunBeef]

10:46 PM on 04/18/2011

Aftef abetting the greatest financial heist of all time, how does S&P even remain in business? They thought the subprime-based junk was A-O-K, just as they were paid to say. This downgrade smells like politics.

[George Hanshaw]

01:32 AM on 04/19/2011

"Aftef abetting the greatest financial heist of all time"

That would be Fannie Mae's collateralized mortgage obligations....

[msbeal]

01:50 AM on 04/19/2011

Fannie had 28% of all the bad debt obligations. The privates held 72% per the Financial Crisis Report.

Painting F&F as the movers and shakers here, although a favorite Republican and Fox News theme, is ludicrous. They were always followers trying to catch up to the rest of the crazies.

[Cameron Hoppe]

10:16 PM on 04/18/2011

Soooo....the same ratings agency that was rating synthetic CDO's (bets on bets on bets) AAA, investment grade, is now decrying US treasury debt. And why? Because sometime ten years from now the government might have to significantly raise taxes to make interest payments.....

Absolutely ridiculous! The United States Treasury has never defaulted on its debt. Even in the throes of the War of 1812 and the Civil War, US Treasury bonds were perfectly safe. They still are today, and will be for as long as the republic exists.

Investors who relied on S & P's ratings of CDOs and mortgage securities have gotten destroyed. S & P rated both Enron and Lehman brothers as BBB+ credit risks just days before their respective collapses.

There is absolutely no reason---none!---for any intelligent, sane person to pay S & P any attention. They are blind leaders of the blind, and when the blind lead the blind both shall fall into the ditch.

[Eidolas]

10:37 AM on 04/19/2011

Could have something to do with the trillion and a half dollar shortfall that will occur in just this year alone and the appearance that the White House isn't serious about dealing with it. Or it could just be a "political judgement" as the President contends. I suppose we could just take an anonymous poster's word on what is happening.

[Cameron Hoppe]

07:18 PM on 04/19/2011

Who's anonymous? My name is right there for all to see, as are my reasoning and evidence. I hide behind nothing. Now, can you name a time when the US has ever defaulted on its debt? And can you point out any place in S and P's release where the current deficit is mentioned? Hope your day is going well.

[Spencer Doidge]

08:00 PM on 04/18/2011

Cutting costs helps, but any business operator worth his or her salt knows the importance of increasing revenues in times of hardship. As I read these articles about the deficit, nobody mentions taxes. The choice is going to come down to either letting people suffer and die in the streets and on the steps of hospitals or getting help from millionaires and billionaires who have been on the dole since the Bush tax cuts.

[Eidolas]

10:36 AM on 04/19/2011

Any business operator worth their salt would cut costs UNTIL revenues increase, something that the U.S. government, let alone the voters, have always been unwilling to do, Democrat or Republican.

[Joe Friday]

06:28 PM on 04/18/2011

ATTENTION LIBERALS!!! ATTENTION LIBERALS!!!

The warning shot has happened. As much as you may hate Wall Street, S&P can drive our economic future down the drain. Barry and the Lib Boys have heaped on the backs of the American Taxpayer Trillions of new debt! Our paper is becoming less of a stable investment. If we default, inflation will rise up to bite Barry on the butt! You can kiss 2012 goodbye!
American Tea Party people see the danger and will now have to cram the solution down the throats of our brain-dead Libs. Barry is also in the way and needs to be marginalized. This issue will do it. Republicans better be in control in 2012!

[Larry Motuz]

07:46 PM on 04/18/2011

I badly need whatever your smoking...the anxiety is killing me.

[Joe Friday]

08:11 PM on 04/18/2011

Liarputz .... You're the Liberal Poster Boy!

[ReckingBall]

07:52 PM on 04/18/2011

Joe, amusing post. Question for you, if politics are a game, who's holding the ball?

I think the president has it, and doesn't know it. Whats your opinion?

[Joe Friday]

08:13 PM on 04/18/2011

Wrongball.... Tea People are in control! Pay attention!

[jeffrey678]

05:49 PM on 04/18/2011

Journalists are required to daily provide a narrative that appears to explain the day's events.

Easy if it's a tornado or train wreck. Ridiculous, usually, when trying to explain daily stock market volatility. But try they must.

Today's narrative is that austerity is bad for business. Whatever. The fact is the market was overbought, too narrowly defined, and was due to take something off the top. So it happened today.

[IgnoranceIsStrength]

05:46 PM on 04/18/2011

Look to the bond market, not the Treasury market really but the bond market in general, and you will find little or no concern with government debt. What we have is a severe employment problem, and given the focus on debt, debt, debt that is likely to last longer than any of us can to project.

As for Treasuries, only speculators are buying and selling the 10-year bond as we would expect in a liquidity trap environment. I am worried, but about employment.

[Larry Motuz]

07:48 PM on 04/18/2011

Very good!

[bearchao]

05:10 PM on 04/18/2011

Great job republicans! All that huffing and puffing about not raising the debt ceiling seems to be paying off.
At least now the rich will finally feel a little of that pain the rest of us have been living with.

[TOPCAT711]

05:09 PM on 04/18/2011

When the 'big bucks' people start getting hurt.....THEN we'll see some changes.

[AG creative]

06:31 PM on 04/18/2011

TC, this is not going to stop. The rich will horde cash until it turns to nothing but paper with numbers and letters.

[sophiemaki]

04:28 PM on 04/18/2011

i love to hear it .....when the market goes down.
i wish they would go back down to 8.

[harveyr2]

04:26 PM on 04/18/2011

The sheeple sell and the smart money buys. Retail customers willingly line the pockets of the wall street pros. Fortunately, the pros don't only live on wall street, some stay at home and make a good living trading the market.

Retail investors: ignore the news it is designed to transfer your wealth to the pros. Don't watch CNN, Fox Business, etc.

Think before you sell, think before you buy. There is always someone on the other side of your trade.