Q: Why are stock prices plunging?
A: Stocks always are considered risky, especially when the economy falters. But when the economy is growing, companies can expand, hire and increase profits. A string of nightmare economic data has led many investors to worry the economy will ultimately dip back into recession. If that does happen, stocks would likely slide more. Investors already were fearful about the economy before the S&P on Friday announced a downgrade to the U.S. credit rating. Oil prices also declining, a sign traders expect the weak economy to limit demand from both consumers and businesses.
Q: If everyone is selling their stocks, where's that money ultimately going?
A: Anywhere safe. Traders are plowing cash into investments thought of as hedges against economic weakness. Gold prices streaked past $1,700 for the first time Monday. And the yields on debt issued by the U.S. Treasury fell as traders, money managers and banks overseas all sought refuge from the wild swings in the market. Bond yields fall as their prices rise.
Q: Why are Treasury prices rising? Didn't S&P just indicate that they are a riskier investment?
A: Investors remain confident that the Treasury will be able to pay its creditors, downgrade or not. And Treasurys are still the world standard for safe, stable investments that can be converted into cash easily. Other nations with AAA ratings have much smaller economies and issue much less debt. When investors seek safety, they don't have many options other than Treasurys.
Q: If the S&P downgrade isn't driving all this selling, why are markets plunging now? After all, the economic data was relatively encouraging on Thursday, when the Dow had its worst one-day point drop since 2008.
A: Things are looking grim in Europe. Central bankers there are trying to prevent Italy and Spain from becoming the latest nations to default on their debts. The European Central Bank on Monday bought up bonds issued by those countries to increase demand for them. A default by Spain or Italy would be disastrous for other nations that use the euro and could affect financial companies worldwide.