Skip to content
Link copied to clipboard

Spain's ratings cut sinks stocks

Fitch gave the country its second downgrade in a month. It capped a dismal May for the markets.

NEW YORK - Stocks closed out their worst month in more than a year by sliding again on more unsettling news about Europe.

The Dow Jones industrials dropped 122 points Friday after Fitch Ratings gave Spain the second downgrade of its credit rating in a month. The rating agency's action reminded traders of the long-term economic problems still facing several European countries, and perhaps the global economy as well.

May was difficult as worries about Europe's debt problems sent the Dow down 7.9 percent and the broader Standard & Poor's 500 index off 8.2 percent. Both indexes had their worst monthly performances since February 2009, the month before stocks began their recovery from 12-year lows. The Dow lost nearly 872 points, its biggest point drop ever for May.

The last trading day of May fit the pattern of the rest of the month. Stocks alternately plunged and recovered, then dropped late in the day as investors decided to play it safe and sell ahead of a three-day holiday weekend.

Fitch cut Spain's rating by one notch, saying the country's plan to cut its budget will likely slow economic growth. Mounting debt forced Spain, among other European countries, to impose austerity measures to try to contain its rising deficit.

The rating agency also cited the recent bailout of a regional bank by Spain's central bank as a sign that the country's economic recovery will lag. Earlier this month, Standard & Poor's lowered its rating of Spain's debt. Greece and Portugal have also suffered downgrades.

Greece, the most troubled European country, has received a bailout, and several other countries are also cutting their spending, but investors fear that the region's debt problems cannot be contained. They are also worried that austerity measures will stifle economic growth and that Europe's slowdown will become the world's slowdown.

The market's drop this month constitutes a "correction." That's a drop of 10 percent or more from a recent high. The S&P 500, the index most watched by market pros, ended May down 10.5 percent from its high for the year, reached April 23. The Dow is down 9.5 percent from its 2010 high, reached April 26. The Dow has regained some ground from its close of 9,974.45 on Wednesday.

On Friday, the Dow fell 122.36, or 1.2 percent, to 10,136.63, its ninth drop in 12 days. The S&P 500 index fell 13.65, or 1.2 percent, to 1,089.41, while the Nasdaq composite index dropped 20.64, or 0.9 percent, to 2,257.04.

The Russell 200 index of smaller companies fell 8.90, or 1.3 percent, to 661.61.

Next week will bring a series of economic reports that will test the market, including the Labor Department's May employment report and readings on manufacturing, consumer spending, and housing.