Dow plunges after S&P downgrade

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NEW YORK (CNNMoney) -- Wall Street had its worst day since the 2008 financial crisis, as fearful investors reacted to the United States losing its coveted AAA credit rating.

All three major U.S. stock indexes sank between 5% and 7%, pushing the Dow below 11,000 for the first time since last November.

U.S. stocks have fallen 15% during the past two weeks.

Though observers said S&P's downgrade shouldn't matter all that much, the market wasn't buying it.

"Investors are having one reaction to the downgrade: sell first and ask questions later," said Paul Zemsky, head of asset allocation with ING Investment Management.

Even if investors dismissed the downgrade, they'd still have to contend with the European debt crisis and rising fears of a new U.S. recession.

Those are the factors that led to a drop of more than 6% last week, the worst since the financial crisis of 2008.

The Dow Jones industrial average (INDU) sank 635 points, or 5.6%, to 10,810.

The S&P 500 (SPX) lost 80 points, or 6.7%, to 1,120.

And the Nasdaq Composite (COMP) dropped 175 points, or 6.9%, to 2,358.

The sell-off was worse than the 512-point drop stocks experienced only three trading sessions ago.

Few companies were spared. All members of the Dow 30 and all members of the S&P 500 traded lower.

Financial stocks were among the hardest hit, with Bank of America (BAC, Fortune 500) plunging 20%, and Citigroup (C, Fortune 500) and Morgan Stanley (MS, Fortune 500) dropped roughly 15%.

The VIX (VIX) -- Wall Street's so-called "fear' index -- jumped 44% to 45.98, the highest level since early 2009.

S&P rating: How to get back to AAA

S&P's downgrade of the United States' credit rating by one notch to "AA+", removed the world's largest economy from the Triple A-club for the first time in history.

Since the rating cut is unprecedented, nobody can be certain what the ultimate impact will be. One thing that concerns investors is the hundreds of downgrades that are coming as a result of S&P's action. The credit agency cut the credit ratings of government-backed mortgage financiers Fannie Mae and Freddie Mac, dozens of U.S. insurance companies, as well as several municipalities that all had AAA ratings before the U.S. downgrade.

President Obama sought to reassure the public and markets during a midday speech. "The markets continue to reaffirm our credit as among the world's safest," said Obama. "Our challenge is the need to tackle our deficits over the long term. But here's the good news. Our problems are emminently solvable. And we know what we have to do to solve them."

With so much uncertainty, investors were leaving little to chance. Despite the downgrade of U.S. debt, Treasury prices rose, pushing yields lower, as investors fled into the relative safety of government-backed debt.

The yield on the benchmark 10-year U.S. Treasury fell to 2.34% from 2.56% late Friday.

"The Treasury market seems to be oblivious to the fact the U.S.' credit rating was downgraded," said Quincy Krosby, market strategist with Prudential Financial.

Gold futures for December delivery surged $61.40, or 3.7%, to top $1,713.20 an ounce as investors sought additional safe havens.

"The downgrade just put investors on an already-heightened state of alert," said Rob Lutts, chief investment officer of Cabot Money Management. "People are exiting any equities they have, and selling off any assets that have any risk exposure."

S&P's U.S. downgrade came at the end of a tumultuous week on Wall Street, with all three indexes delivering their worst performances since the darkest months of the 2008-2009 financial crisis.

European debt crisis: The European Central Bank signaled in a statement Sunday that it was ready to begin buying Italian and Spanish government bonds -- stepping up its efforts to slow the rising panic over the eurozone's debt crisis.

In a separate announcement, finance ministers from the G-7 -- a group of significant world economies -- pledged support for troubled countries.

Though the ECB's support relieved some concerns about Europe's ongoing debt crisis, the uncertainty of the aftermath of S&P's downgrade overwhelmed any investor optimism.

"The [ECB's] steps and direction are right but investors are questioning whether officials will be able to do the breadth and depth of assistance needed," said Mike Pond, co-head of interest rate strategy with Barclays Capital.

European stocks ended the session sharply lower. Britain's FTSE 100 (FTSE) dropped 2.7%, the DAX (DAX) in Germany sank 4.7% and France's CAC 40 (CAC) dropped 4.2%.

Meanwhile, Asian markets ended deep in the red. The Shanghai Composite retreated 3.8%, the Hang Seng in Hong Kong and Japan's Nikkei each fell 2.2%.

Bonds: Currencies and commodities: The yen and the Swiss franc -- perceived to be two of the world's safest currencies -- rose against the dollar.

The U.S. dollar, also considered a safe haven, managed to gain some ground against the euro and the British pound.

Oil for September delivery dropped $5.60, or nearly 6.5%, to $81.27 a barrel.

Economy: Moody's Investors Service explained Monday why it was sticking with its triple-A bond rating and negative outlook for the United States -- setting itself apart from Standard & Poor's.

Moody's said it expects the economy will improve, and that additional measures to reduce the budget deficit will be in place by 2013.

Companies: Berkshire Hathaway (BRKA, Fortune 500) joined the bidding pool for reinsurer Transatlantic Holdings (TRH), with an offer Friday. Transatlantic said they were given until Monday night to decide whether to accept Berkshire's offer. Shares of Transatlantic surged 5.4%.