World markets plunged Monday in the worst trading day since the financial crisis, eradicating hundreds of billions of dollars of wealth in a setback to the struggling U.S. economic recovery.
Despite efforts by world leaders to reassure markets, investors remained alarmed over the mounting economic woes in the United States and a spreading debt crisis in Europe. The Dow Jones Industrial Average fell 635 points, or 5.55 percent, to 10,810.
But in the first trading day since the United States was downgraded Friday by Standard & Poor’s, which said U.S. Treasury bonds have become a riskier bet because of the government’s failure to tackle its debt burden, investors actually poured money into U.S. bonds.
With concerns spiking about a global economic slowdown, investors were treating the Treasury bond as the safest haven in a time of turmoil.
In Washington, President Obama went on television in a bid to reassure the markets, declaring that the nation would always meet its obligations. “We’ve always been and always will be a triple-A country,” Obama said.
On Monday, S&P followed its downgrade of the government by cutting the ratings of mortgage giants Fannie Mae and Freddie Mac and other institutions that depend on federal guarantees.
U.S. economic policymakers were growing increasingly worried about the market volatility. The Federal Reserve is likely to consider new measures to boost economic growth at its regularly scheduled meeting Tuesday.
The Treasury Department has intensified its discussions with domestic and foreign investors over what they’re seeing in the markets and stepped up its work with other countries to muster an international response to the crisis. Officials have also been encouraging European policymakers to do more to contain the growing debt crisis on the continent, according to people familiar with the matter.
U.S. policymakers are also paying close attention to new signs of trouble among major banks. The Financial Stability Oversight Council, which was established under the financial reform legislation adopted last year, held an emergency conference call Monday to discuss risks to the financial system posed by market volatility but did not take specific action.
Bank stocks were among the biggest losers on Monday. Bank of America and Citigroup both lost more than 15 percent of their value.
Spokesmen for the banks said they were well fortified against the decline in their stock.
The violent market reaction was reminiscent of the 2008 financial crisis.
While an economic recovery had seemed to be gaining steam, U.S. and European economies have shown signs in recent months that they are losing momentum and that it could take much longer than anticipated to bounce back from the 2008 crisis. Investors, who had sent stock markets soaring, have been having second thoughts.
The panic in the markets threatens to undercut the recovery even more. Not only has the sell-off eliminated billions of dollars of wealth, it is also unnerving consumers and businesses. The economy needs both consumers and businesses to have the confidence to spend and hire.