By Rita Nazareth – Aug 8, 2011 1:08 PM PT

U.S. stocks tumbled, extending the biggest slump for the Standard & Poor’s 500 Index since 2008’s bear market, amid concern that a downgrade of the nation’s credit rating by S&P may worsen an economic slowdown.

The 10 groups in the S&P 500 fell more than 3.8 percent. Bank of America Corp. (BAC) erased 20 percent to lead financial shares in the S&P 500 down 10 percent. Ford Motor Co. (F) and Caterpillar Inc. (CAT) slumped at least 8.4 percent, pacing losses in stocks most- tied to the economy. Chevron Corp. (CVX) fell 7.5 percent as oil sank to an eight-month low.

The S&P 500 retreated 6.7 percent to 1,119.51 at 4 p.m. in New York. The gauge slumped 11 percent in three days, the most since November 2008, and fell to the lowest since September 2010. The Dow Jones Industrial Average slid 634.76 points, or 5.6 percent, to 10,809.85. The Russell 2000 Index of small companies slumped 8.9 percent, entering a so-called bear market, down 25 percent from its April 29 high.

“There’s no reason to get in front of this train,” Keith Wirtz, Cincinnati-based chief investment officer at Fifth Third Asset Management, which oversees $16.7 billion, said in a telephone interview. “Yes, there’s cheapness in the stock market, but right now emotions are high. There’s enough uncertainty out there. People are moving towards no risk. That includes Treasuries, which is ironic.”

Bear Market

The downgrade extended a rout that had wiped out $1.94 trillion in market value from the country’s stocks amid concern the economic recovery is at risk. Global equities tumbled and European shares entered a bear market. The Stoxx Europe 600 Index has now fallen 21 percent from this year’s high on Feb. 17. The S&P 500 is down 18 percent since April 29.

S&P lowered the U.S. long-term rating one level to AA+ after markets closed on Aug. 5, while keeping the outlook at “negative” as the company becomes less confident that Congress will end Bush-era tax cuts or tackle entitlements. S&P also said the U.S. rating may be reduced to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt.

Equities extended losses today as S&P also lowered credit ratings on Fannie Mae, Freddie Mac and other lenders with a “direct reliance on the U.S. government,” spurring concern over the ripple effects of the loss of America’s AAA rating.
Treasuries Rally

Treasuries rose today. Two-year yields fell to a record low after Japanese Finance Minister Yoshihiko Noda said U.S. Treasuries were attractive. Group of Seven nations said they will take every action necessary to stabilize financial markets after the U.S. credit rating downgrade.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased holdings of Treasuries to 10 percent from 8 percent and cut cash holdings to 15 percent from 29 percent.

“If you’re an investor and you say — I’m worried about what’s going on in the world, I’m worried about liquidity and safety, you basically have no place to go other than the Treasury market,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, said in a telephone interview. His firm oversees more than $38 billion.

Barton Biggs, who last week called U.S. equities a “strong buy,” said he cut risk in his Traxis Partners LP hedge fund. “I’ve taken some risk off, and I hate to do it, I think it’s probably the wrong thing to be doing,” Biggs, who helps manage $1.4 billion as managing partner and co-founder of Traxis, said in a Bloomberg Television interview. “But I’m a fiduciary to a certain extent, and I’ve got to protect my capital.”
Volatility Soars

The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 46 percent to 46.80, the highest since March 2009.

The Morgan Stanley Cyclical Index of 30 stocks tumbled 9 percent. The Dow Jones Transportation Average, which is also a proxy for the economy, retreated 7 percent. Ford sank 8.4 percent to $9.93. Caterpillar decreased 9.2 percent to $82.60.

The KBW Bank Index of 24 stocks slumped 11 percent. Bank of America dropped 20 percent, the most in the S&P 500, to $6.53. American International Group Inc. (AIG), the bailed-out insurer, sued the largest U.S. lender by assets over $10 billion in losses on mortgage-bond investments.
‘Double Dip’

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