After the S&P 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 5 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.
But now that the inevitable has happened, what does it mean for the market and for regular Americans with 401ks and IRAs?
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.
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.
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 across the last 11 trading days as investors headed for the hills.
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 plus" ranking Standard & Poor's now applies to Treasuries? Not likely alternatives, any of these.
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 T-Note has plummeted from 3.2% to a bit over 2.3%.
Those aren't exactly junk bond rates. If folks were shunning Treasuries than 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.
Of course, there's always Canada to invest in... or move to.
Jeff Reeves is the editor of InvestorPlace.com.Write him at editor@investorplace.com.
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Seriously, Republicans walked away from the $4 trillion deal and the end product was this mushy "we'll talk about it later and get something done then" deal. None of which will happen, because a head-butting committee of hard-liners won't get squat done and we all know that in our guts.
I believe if you put it to a nationwide referendum, you'd find out that the majority would say "bring back Clinton" and then in the next breath would say, "Cut defense and tax the rich."
S&P said they we going to downgrade months ago w/o a balanced budget amendment AND a ~4 trillion reduction in debt.
Seriously though...
I think maybe a better headline would have been, "Don't Panic: The U.S. Credit Downgrade Changes Very Little in the Short Term."
We'll see what happens, and as much as I try to be pragmatic about the whole thing, the trends leading up to this 'downgrade' don't explain everything to my liking.
In the final analysis, when all the wall-street bots and economic gurus have had their say, after congress shows every inch of their respective asses - Perception is Reality.
Confidence and faith are at the core of any market, and from what I can tell, that confidence is being intentionally undermined for the benefit of those who would profit from manufactured panic in the U.S.
It changes history. Way to go, O.
We just printed ourselves a credit card with a $1 Trillion limit and at the same time our rating is downgraded meaning that as the spendthrift Democrats gobble it up, we Americans will have to pay higher interest rates on that money to pay it all back.
We've been tied, roasted and toasted by the current politicians who will -- just as they did with TAARP, stimulus and all the other piggy banks -- run off with the loot!
I agree that TAARP and the stimulus were not the best of schemes. There should have been a way to funnel the $ back to the people via a CCC-type program which would have solved two problems. There is enough blame to go around for both parties about a variety of things. The American people are the losers here, but...
Clinton had the budget balanced and then, and then came "W." The Decider in Chief who decided to fight unfunded wars and cut taxes for the wealthy.
Counting the 22 years prior to "W" and adding his 8 years, GW Bush ran up nearly half of the American deficit during that 30-yr period. During "W's" reign gov't spending rose 26 points to 82% of GDP (The highest of any President since WWII). Obama has raised it only nine points.
So when you talk about spending and political parties, let's keep the record on track and according to the facts. Here is the link where you can check the numbers and charts and more about George W. Bush's spending ways - http://www.thedailybeast.com/articles/2011/08/05/economic-meltdown-villain-george-w-bush-s-staggering-debt-numbers.html
When the GOP does spending, they spend on the wealthy and their cronies; not the average American. Taxes are the price we pay for a civilized society - Oliver Wendell Holmes