Aug. 6, 2011, 5:24 p.m. EDT
Don’t panic: Why S&P’s downgrade means nothing
Commentary: Washington still useless, Treasuries still a safe haven
By Jeff Reeves
ROCKVILLE, Md. (MarketWatch) — After the Standard & Poor’s downgrade of U.
S. debt, America now carries a rating of AA-plus instead of the coveted AAA
rating on its Treasury bonds. Austria, Norway, Germany and Australia are no
longer our peers ratings-wise — we are, instead, in the company of Japan,
China, Spain, Taiwan and Slovenia.
Market watchers have suspected a downgrade was in the works for a while. Not
to toot my own horn, but last week in my column about five ugly truths
about the debt ceiling, one of my takeaways from the deal was that a credit
downgrade was in the works regardless of the fact we avoided default. Looks
like my prediction, and the prediction of other financial journalists who
made the same call of a credit downgrade, didn’t take long to come true.
Read 5 ugly truths about the debt ceiling.
But now that the inevitable has happened, what does it mean for the market
and for individual investors?
Interestingly enough, not much. Washington is still useless. The stock
market will continue the correction that began two weeks ago. And Treasury
bonds, strangely enough, will remain a safe haven for investors.
Why this doesn’t change the narrative in Washington
S&P ain’t breaking any news here. Its reasons for the downgrade include “
political brinkmanship” in Washington. “America’s governance and
policymaking becoming less stable, less effective and less predictable than
we previously believed,” said S&P. It went on to say $2.1 trillion in cuts
“fell short” of the needed reforms. Shocking revelations, I know. Read the
full story on S&P’s downgrade of the U.S. credit rating.
While the downgrade is not to be taken lightly, it’s just a confirmation of
spending problems that have been slowly eating away at the creditworthiness
of America for some time. And for those of you who think this will shake
our fat-cat legislators by the lapels and wake them up… well, just look at
the quotes that emerged over the weekend.
Predictably, the GOP blames the Obama administration for the downgrade —
with Sen. Jim DeMint even calling for Treasury Secretary Timothy Geithner’s
resignation. The Democrats are pointing fingers, too, with those pesky tea
party extremists to blame for everything. Read why Congress is killing jobs,
not creating them, on InvestorPlace.com.
Sorry America, but the downgrade is just the latest development in this
asinine game of chicken that Congress is playing to decide the White House
in 2012.
Why this doesn’t change the stock market outlook
And that outlook, in case you’ve been living under a rock, is ugly.
The state of the stock market was already grim last week before the U.S.
credit downgrade — and got worse after Thursday’s gut-wrenching slide that
marked the worst decline since 2008. All told, we have endured an 11%
rollback in the S&P 500 (SNC:SPX) across the last 11 trading days as
investors headed for the hills. Read about why there will be no rally
anytime soon on InvestorPlace.com.
So the biggest question isn’t how much the S&P downgrade is going to affect
the stock market on Monday, but how many dominoes will continue to fall as
part of the broader crisis of confidence. The downgrade surely won’t help
— but it’s just one more log thrown on the fire that is already burning
pretty darn hot.
Why this doesn’t change the safe haven status of Treasury bonds
The U.S. credit downgrade shouldn’t have much of an impact on the perceived
security Treasury bonds provide. Why? Well, consider the alternatives out
there right now.
Stocks? CDs that barely keep pace with the rate of inflation? Corporate
bonds or muni bonds that rank even more poorly than the AA+ ranking Standard
& Poor’s now applies to Treasuries? Not likely alternatives, any of these.
Read about 6 solid picks to dumpster dive for on InvestorPlace.com.
Investors haven’t stopped buying T-notes lately, and shouldn’t on Monday
morning. Just take a look at Friday’s news that the 10-year Treasury yield
dropped by the largest amount in one week since 2009. In the last month
alone, yields on the 10-year note has plummeted from 3.2% to a bit over 2.3%
.
Those aren’t exactly junk-bond rates. If folks were shunning Treasuries
then the government would have to entice investors with bigger yields to
offset the perception of bigger risks. Yes, the downgrade means that T-notes
are riskier than they were before. But relatively, they are a much safer
bet in the minds of many investors considering this difficult economic
environment.