The big news the world today is the downgrading of our country’s credit rating.
Credit rating is defined as a classification of credit risk determined by a credit agency, based on investigation of a customer’s or potential customer’s financial resources, prior payment pattern and personal history or degree of personal responsibility for debts incurred.(Webster’s Dictionary)
Our sterling AAA credit rating is now AA+, and though still an excellent rating, there will be repercussions. Standard & Poor’s, one of the credit rating agencies, has already downgraded Fannie Mae and Freddie Mac, and will be looking closely at other state and municipal governments that rely on federal government spending.
Although one would expect people to lose faith in Treasuries, in the short-term we are already seeing a “flight to quality” with investors moving from the stock market to Treasuries and to gold. That means stocks are on sale.1
What does this mean for you? Perhaps as Warren Buffet said “Be fearful when others are greedy, and be greedy when others are fearful.” We may be at one of those times when others are fearful!
Here’s what you will likely see in the near future:
- The market will likely continue to be volatile as it reacts to the S&P rating downgrade. This type of volatility may be short-lived and prove to be a buying opportunity.
- The economic news for the first half of the year has been discouraging, but some economists look for the economy to accelerate slightly during the second half of 2011.
- This type of market action is more characteristic of the end of a market correction, not the beginning of a new bear market.2
If you want to talk about what is happening in the markets and how it impacts you and your investments, please give me a call! 503-452-7000
For another opinion about the market situation I would recommend reading Paul Krugman’s NYTimes articles called Credibility, Chutzpah and Debt
Sources:
- Clark Capital Management Group Market Summery, 8/7/11
- How do the chips fall now that the S&P has downgraded U.S. debt? By Patrick Faul, VP, Head of Credit Research, Calvert Investment Management, Inc.
© Luna Jaffe 2011
