The stock market continued diving on Monday, with the Dow falling 5.6% and the S&P down 6.7%, the biggest sell-off since December 2008.

The S&P downgrade appeared to have been one of the major factors that prompted the selling spree, and a flight towards Treasuries. Despite Treasury bonds being exactly the thing that got downgraded, they’re still seen as safer than stocks.

However, it was the political gridlock and brinkmanship over the debt ceiling that pushed S&P to put the U.S. debt at one notch below the premium AAA rating. Budget hawks who say that the country can’t afford to spend more seem to have won the day. Some economists say that more spending is needed to keep the economy from sliding further. So what markets are really reacting to is that it has become apparent that stimulus spending appears to be out of the question for the foreseeable future.

Stocks in Asia and Europe dropped sharply. Attempts by the European Central bank to shore up bond markets to help Spain and Italy did nothing to calm investors. Gold rose to over $1,710 an ounce. S&P futures fell in after-hours trading, presaging more market declines for Tuesday, though there is also the possibility of a rebound from bargain-hunting activity.

Stocks Suffer Sharpest Drop Since 2008 [NYT]

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