Debt Downgrade
The last week has seen some extraordinary events: a high stakes political process culminating in a deal to increase our nation's debt ceiling coupled with promises to reduce increases in spending by the federal government and, on Friday, S&P downgrading US Treasuries to a AA+ rating -- their second highest credit rating. It is worth noting that earlier last week two other credit rating agencies affirmed US debt obligations at their highest AAA credit rating. History has shown that markets generally react unfavorably to uncertainty and the market gyrations that have transpired over the last two weeks, and more specifically the last three trading days, are further evidence of this. The US is not the first country to have its high quality debt downgraded. Canada was downgraded in 1993, and their stock market actually rose in the next year. The rate on their ten-year bonds went from 7.6% to 8.1% -- not a significant jump. Eventually Canadian bonds were upgraded back to AAA. With the selloff in the equity markets yesterday, many investors may not have noticed that prices on US Treasuries actually increased, driving yields on the US ten-year treasuries to historically low yields.
While we cannot predict what will happen over the coming days and weeks, rest assured that we are monitoring your portfolio on a daily basis to look for opportunities to rebalance and harvest tax losses. Even with the recent market drop, longer term clients' portfolios are still well above levels we saw in the spring of 2009. Just as rebalancing and loss harvesting was the right thing to do then, it is the prudent course of action now. A downgrade by one rating agency (or affirmation of a rating by two other agencies) does not change the fundamentals of the economy, the relationship between risk and return in the financial markets or even the nation's fiscal status. As always, please do not hesitate to call us if you have any questions, concerns or if you just want to touch base during these volatile times.
For an academic's perspective on recent economic events, please click here to read the comments of Burton Malkiel, professor emeritus of economics at Princeton University and the author of "A Random Walk Down Wall Street."