I wanted to throw some thoughts out on the dreaded downgrade from S&P. Bottom line: it isn’t a big deal.
1. Why isn’t it a big deal? Investors in US government bonds already knows our government debt equals our Gross Domestic Product (GDP), which is the size of our economy. This isn’t news. S&P isn’t providing any information that isn’t easily attainable to the average investor. It isn’t like they discovered trillions in debt that we didn’t know about. Japan’s debt was downgraded in 2002, and everyone expected the worst for Japanese bonds. Yet, they have rewarded investors nicely since that point as yields dropped further and haven’t climbed like the world anticipated.
2. The markets may be volatile today and tomorrow, but it is short term noise. Ultimately, the market reflects the growth of the economy and corporate earnings. If those factors do well, so will the stock market. Certainly, higher interest rates affects corporate profits so this downgrade could hurt the market if interest rates rise. This leads to the next point.
3. Why did we get downgraded? Because we EARNED it (insert John Houseman impersonation here). Don’t believe the politicians as they blame S&P for the market turmoil or even the Tea Party Republicans. S&P should be applauded for standing up to the US government. Our politicians, both Democrat and Republican, put us in this position with their inept management and stupidity. This brings me to the next point.
4. Politicians are nothing more than professional wrestlers in Armani suits. Like wrestlers, they say horrible things about their competitors and fire up their fans (the base), but the reality is the fight is fixed. Both parties overspend and swap favors then grab a beer after the “fight”. The difference between the Republicans and Democrats is similar to the difference between Jif and Skippy peanut butter…not much (but they are all nuts).
So don’t worry about the market volatility that much. In fact, you should be thankful for the volatility as it is this volatility that enables stocks to provide a higher return. The lack of volatility is why CDs pay so little. You know you are getting a guaranteed return – albeit paltry. For clients of Picket Fence Financial, you don’t have to sweat the stock market as we moved out in July as the Fed ended its Quantitative Easing program.
Either way, stick to your long term plan. Do not panic. This market could turn around for the better at a moment’s notice. If you don’t have a clear investment strategy, then this volatility should prompt you to do so.