Stock Market Volatility

Everyone knows what happened with Standard and Poor’s downgrade of the US debt. Now we are seeing the effects of this move with a day that the markets sold off 5+%. The markets are being driven by fear and uncertainty mainly caused by the poor economic numbers, the debt downgrade and the perceived dysfunction of Washington.

This is not 2008 and the issues are very different.

It’s our opinion that this downgrade of the US was based, not on an ability to pay bond-holders, but on the fact that there is so much political turmoil going on right now and it most likely will continue in the months ahead. We feel that the ultimate decision to downgrade US debt was a political statement and not one based on the ability of the US to meet its debt obligations. But we do agree with S&P that the US government spending has to change but a downgrade seems questionable when its unquestionable the US would ever default.

If this move by S&P helps the US get more serious about deficit reduction, then it will have been a very positive development. If it influences the political environment by pushing the US to a more rational set of fiscal values it will be even more positive.

The US dollar is still the world’s reserve currency, which means actual default is virtually impossible. In fact, after the US was put on credit watch by S&P in mid-July, US treasury yields fell, they did not rise. Ten-year interest rates, on Friday, were lower in the US than in Canada, Australia, United Kingdom, France, New Zealand, or Norway – all AAA-rated countries. This means that investors, not governments and not rating agencies still view the US as the “safe haven” for capital.

The S&P downgrade alters nothing about the economy or corporate profitability in the short, medium or even long- term. We believe the markets are over-reacting to fears about the economy, the debt deal, and European financial issues. The markets are experiencing a 10+% correction, this is standard issue and we need to expect these things to happen at least once every other year. Corrections should be looked upon as a natural part of the market cycle and should be looked upon as buying opportunities. Today’s downdraft might not be the end of this correction but it certainly gets us closer to the end.

If one rationally looks at the stock market and realizes the value of these companies then one should conclude that stocks are cheaply priced. The markets are being driven by headlines and economic numbers right now and not by how companies are doing. Balance sheets of corporations are very strong with most companies meeting or exceeding their earnings numbers.

Remember when you invest in stocks you’re investing in companies and many have very rich balance sheets right now. It’s mainly the “other stuff” that is making this market act crazy. Although the market decline might continue we don’t believe it will last long. Selling into a market like this makes no sense. These ugly markets and ugly economic situations are historically the best time to buy. With the market being historically cheap by standard valuation methods and with tons of cash on the sidelines now is a great opportunity to increase equity holdings.

For 401k/403b investors, unless your objectives have changed, this is just part of the investment cycle and changes to your allocations should be unnecessary at this time.

Questions?

Should you have any questions, contact our plan’s financial advisors.