Debt downgrade


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Wesban's thoughts on the recent S&P downgrade and what it means for the stock market.

Published in: Economy & Finance, Business
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Debt downgrade

  1. 1. You’ve undoubtedly been watching the equity markets over the past two weeks and grownconcerned with the downward march taking place. As of yesterdays close the market wasdown again nearly 6% as measured by the Dow. Large company gains over the past yearhave disappeared as we deal with the aftermath Standard & Poors rating downgrade and thebrinkmanship in Congress. Long-time comingStandard & Poors (S&P) is one of three major credit rating agencies which rates governmentsand companies ability to repay their debts. On Friday they downgraded the U.S. debt whilemaintaining a negative outlook for the future driven largely by Congress’ inaction until the lastmoment. Fitch and Moody’s, the other two credit ratings agencies affirmed their AAA rating onthe U.S.Whatever criticism you hear of S&P (plenty will come from the media and White House) isbeside the point. S&P is right and the downgrade is long overdue. The U.S. is and has beenliving beyond its means for many years and is projected to continue doing so. The downgradeis a reflection not of our ability to pay, but whether our elected officials can come together andmove the country forward. Twilight ZoneImagine balancing your personal checkbook to zero each month. You can’t spend any moremoney because you have none. But If your the U.S., Volia! you can issue more debt and fillyour account right back up to spend again. In times of economic distress this is exactly whatwe should do, but we must spend our dollars wisely...Given our poor fiscal housekeeping coupled with the S&P downgrade and historically lowyields you may have expected a treasury sell-off and a flight to quality investments. Yet justthe opposite happened: Investors sold quality companies with significant cash on theirbalance sheets--and purchased more treasuries.This correction is not based on economic fundamentals which have been improving (albeitglacially slow); rather fundamentals are out and pure emotion drove the sell-off over the pastfew days. As a nation we are not in any meaningfully different place than two weeks ago.
  2. 2. Our equity managers are capitalizing on the opportunities this mini-correction presents givingthem opportunities to load up on high quality stocks at discount prices. In short: the market isvastly oversold at this point. I would not be surprised to see it pop back up over the next fewweeks.Unless your investment objectives have substantially changed we do not recommendwholesale changes to your portfolios at this time. Our portfolio construction methodologyexpects market corrections from time to time. We are assessing all portfolios for opportunisticre-balancing and tax harvesting opportunities. Time out AmericaWe don’t expect the S&P downgrade to meaningfully affect the U.S. despite all thehand-wringing from the government and news media. We do hope that this serves as a wakeup call that we cannot live beyond our means perpetually. A combination of tax increases andspending reductions will lead us out of this mess once Congress can muster the political will tomove the country forward.United we stand or divided we will most certainly fall.