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Debt downgrade
- 1. You’ve undoubtedly been watching the equity markets over the past two weeks and grown concerned with the downward march taking place. As of yesterdays close the market was down again nearly 6% as measured by the Dow. Large company gains over the past year have disappeared as we deal with the aftermath Standard & Poors rating downgrade and the brinkmanship in Congress. Long-time coming Standard & Poors (S&P) is one of three major credit rating agencies which rates governments and companies ability to repay their debts. On Friday they downgraded the U.S. debt while maintaining a negative outlook for the future driven largely by Congress’ inaction until the last moment. Fitch and Moody’s, the other two credit ratings agencies affirmed their AAA rating on the U.S. Whatever criticism you hear of S&P (plenty will come from the media and White House) is beside the point. S&P is right and the downgrade is long overdue. The U.S. is and has been living beyond its means for many years and is projected to continue doing so. The downgrade is a reflection not of our ability to pay, but whether our elected officials can come together and move the country forward. Twilight Zone Imagine balancing your personal checkbook to zero each month. You can’t spend any more money because you have none. But If your the U.S., Volia! you can issue more debt and fill your account right back up to spend again. In times of economic distress this is exactly what we should do, but we must spend our dollars wisely... Given our poor fiscal housekeeping coupled with the S&P downgrade and historically low yields you may have expected a treasury sell-off and a flight to quality investments. Yet just the opposite happened: Investors sold quality companies with significant cash on their balance sheets--and purchased more treasuries. This correction is not based on economic fundamentals which have been improving (albeit glacially slow); rather fundamentals are out and pure emotion drove the sell-off over the past few days. As a nation we are not in any meaningfully different place than two weeks ago.
- 2. Our equity managers are capitalizing on the opportunities this mini-correction presents giving them opportunities to load up on high quality stocks at discount prices. In short: the market is vastly oversold at this point. I would not be surprised to see it pop back up over the next few weeks. Unless your investment objectives have substantially changed we do not recommend wholesale changes to your portfolios at this time. Our portfolio construction methodology expects market corrections from time to time. We are assessing all portfolios for opportunistic re-balancing and tax harvesting opportunities. Time out America We don’t expect the S&P downgrade to meaningfully affect the U.S. despite all the hand-wringing from the government and news media. We do hope that this serves as a wake up call that we cannot live beyond our means perpetually. A combination of tax increases and spending reductions will lead us out of this mess once Congress can muster the political will to move the country forward. United we stand or divided we will most certainly fall.