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Dow dropped 634 Monday in worst one-day drop since December 2008

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Updated: September 10, 2011 12:35AM

In the market’s storm of Monday, an intense and daylong pounding that uprooted retirement portfolios and damaged dreams of economic growth, something funny happened.

Treasury prices rose. The Standard & Poor’s credit downgrade of the United States was the root cause of the market plunge that sent the Dow Jones industrial average down 634.76, its sixth-largest point loss, and yet people poured money into the debt whose issuing agency is the U.S. Treasury Dept.

It was a sign that investors were treating the U.S.’ long-term debt with more reverence than the Standard & Poor’s analysts. When anxiety takes over the markets, the U.S. dollar is still the preferred place to go.

The Chinese or the Russians might talk about displacing the dollar as a “reserve currency,” but money movers apparently have no such thought.

Higher prices for the 10-year Treasury drove down its yield, which moves in the opposite direction, to 2.36 percent from 2.57 percent late Friday. The decline means that the U.S., despite the knock its credit rating took late Friday, still will have to pay less interest to borrowers.

But there was no confidence in the stock market. Reacting to the S&P rate cut and to a darkening financial picture in Europe, the Dow lost 5.6 percent of its value to close at 10,809.56 and end the session on the day’s lows.

The Standard & Poor’s 500, unconnected to the S&P ratings business, lost 79.92 points, 6.9 percent, to 1,119.46, with all of its stocks losing ground. The Nasdaq composite index fell 174.72 points, 6.9 percent, to 2,357.69.

Jim Hagedorn, president of Chicago Partners Investment Group LLC, said a clear stocks-vs.-bonds split has emerged among investors. Some clients regard stocks as highly attractive and are buying opportunistically, he said, but most believe it’s more prudent to stick with bonds.

Hagedorn, whose firm manages $500 million, said he’s cautioning clients to watch for the risks buried in bonds. “Right now, the focus of the market is price risk’’ for stocks, he said. “The other risk is with inflation.”

Monday’s selloff puts stocks deep into negative territory for the year. Market participants had different reactions to the S&P move, with some saying it rattles confidence enough to make a recession more likely, while others portrayed it having little long-term importance.

Diane Swonk, chief economist at Mesirow Financial Holdings Inc., said the S&P move, based on political deadlock over mounting public debt, was “questionable” and damages the near-term outlook for job growth. “The tragedy is that what was intended for the body politic missed its target and hit the American public instead,” Swonk said.

Brian Wesbury, chief economist at First Trust Advisors LP, said the markets are overreacting. The credit downgrade, he said, “alters nothing about the economy or corporate profitability in the short, medium or even long term,” he said.

In a fast-moving day, here were other developments in the markets:

†Gold and silver prices rose in the demand for safe havens, while crop prices declined on fears of a slower economy. Gold for December delivery rose $61.40 to hit a record close of $1,713.20 an ounce, while September silver gained $1.169 to settle at $39.38 an ounce.

†The CBOE Volatility Index, the VIX, rose 50 percent to close at 48, its highest since March 2009. The VIX is called the “fear gauge” and measures expected volatility in the S&P 500 in the coming 30 days.

Its creator, the Chicago Board Options Exchange, said Monday was the busiest trading day in its 38-year history, with 10.86 million options contracts dealt. It beat a record set Friday.

†The European Central Bank tossed lifelines to Italy and Spain. Traders said the bank spent $2.8 billion to buy the two nations’ debt and drive down their soaring interest rates. But many worried that the bank was destabilizing itself and that Italy and Spain will default or require much more help.

†The dollar rose against most currencies, but declined against two that share its safe-haven appeal, the Japanese yen and the Swiss franc.

†Oil prices fell to their lowest point of the year on the possibility that a slower economy will reduce demand for fuel. Benchmark West Texas Intermediate crude lost 6.4 percent in New York trading to close at $81.31 a barrel.

†Global stocks wilted before U.S. traders awoke. Germany’s DAX index was down 5 percent, Britain’s FTSE 100 was down 3.4 percent and Japan’s Nikkei lost 2.2 percent.

†Greece banned short selling for two months on the Athens Stock Exchange after its shares fell to their lowest level in 14 years.

Contributing: AP

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