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

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.