Shares plunge as debt default nears

New York Stock Exchange traders saw share prices New York Stock Exchange traders saw share prices erode Wednesday as gridlock in Washington over the looming U.S. debt default continued. The Dow had its worst day in eight weeks. (July 27, 2011) Photo Credit: Getty Images

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Stocks plunged Wednesday as the United States edged closer to defaulting on its debt and the economy showed more signs of deteriorating.

Major indexes gave up all of their gains for the month. The Dow Jones industrial average fell 198.75 points, or 1.59 percent, to 12,302.55, its biggest one-day drop since early June. It has fallen for four days straight.

The Standard & Poor's 500 fell 27.05 points, or 2.03 percent, to 1,304.89. The technology-focused Nasdaq composite index fell 75.17 points, or 2.65 percent, to 2,764.79, its worst day in five months.

The Dow is headed for its worst weekly decline in nearly a year and is now 4 percent below the 2011 high it reached on April 29. The S&P, which serves as a benchmark for most mutual funds, is also down 4 percent from its recent peak.

"As hours pass and the uncertainty builds, I think the market is starting to price in the potential that we might not have a solution by Aug. 2," the deadline for raising the U.S. debt limit, said Channing Smith, managing director of Capital Advisors Inc. "Confidence in our political system is beginning to fade."

Nearly half of the Dow's losses came in the last two hours of trading, after the Federal Reserve released a survey showing that the economy deteriorated in much of the country this summer. The economy slowed in seven of the Fed's 12 regions because of weak home sales and a slowdown in manufacturing.

The declines were broad. More than 10 stocks fell for every one that rose on the New York Stock Exchange, and all but two of the 30 stocks in the Dow average fell.

Small-company stocks fell more than the rest of the market. Small companies are more vulnerable to economic downturns since they make fewer products and usually have less cash on hand than large companies.

With the deadline for a debt deal just six days away, investors are selling the stocks they consider to be the riskiest. The Russell 2000 index, which tracks smaller U.S. companies, fell 3 percent, almost twice as much as the Dow.

The Dow is down 3 percent this week. It is headed for its biggest weekly decline since August 2010. The S&P 500 is also down 3 percent, and the Russell 2000 is down 4.9 percent. The Dow and the S&P 500 are down about 1 percent for the month.

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