Markets:
For the week of August 8, 2011 through Thursday, August 11, 2011
- Standard & Poor’s 500 Index: -2.23%
- Dow Jones Industrial Average: -2.63%
- NASDAQ Composite: -1.57%
This has been one of the craziest weeks in history. For the first time ever, the Dow Jones Industrial Average has moved more than 400 points in either direction for four consecutive days. Over the weekend, the Standard & Poor’s rating agency downgraded the United States’ credit rating from triple-A to double-A+. This is the first time this has happened since the ratings began. It sparked a sell-off in equity markets on Monday. The downgrade forced subsequent downgrades of municipal bonds and companies with exposure to U.S. Treasury bonds. Across the pond, the European Central Bank has agreed to large scale purchases of Spanish and Italian bonds. We believe anyone who is in the market for the long term should weather the storm, and we encourage them to continue to dollar cost average into the market. We believe the roller-coaster ride this week is unlikely to continue.
United States Credit Downgrade
- The United States received its first downgrade of debt from triple-A to double-A+.
- In what was seen as a political move, the downgrade came after the markets closed on Friday, despite a $2 trillion error in math by S&P.
- The downgrade sparked a market sell-off in the equity markets on Monday as investors looked for so-called “safe-haven” assets.
- Despite the downgrade, the yield on Treasurys declined this week.
- The market does not fear that the United States will not be able to service its debt obligations.
Georgia State Bonds
- Georgia is one of eight states that has a triple-A credit rating.
- Following the downgrade of U.S. debt, pre-refunded Georgia bonds with U.S. Treasury securities that were downgraded from triple-A to double-A+.
- The remainder of Georgia’s bonds keep their triple-A rating.
Congressional Debt Committee
- All 12 committee members were named this week.
- This committee was created to make spending cuts and reduce the deficit.
- Time will tell if the committee can reach an agreement on spending cuts before automatic cuts are triggered in November.
- Congress is on vacation until September, meaning there is little time to reach a deal.
The United States Dollar
- If the dollar declines in value:
- Goods produced in the United States will be more competitive.
- When the dollar declined from 2002-2007, exports surged.
- This, generally, adds to GDP, which should help the employment situation.
- The cost of raw materials from outside the United States will be more expensive leading to higher prices.
- Interest rates could rise to entice foreign investors into dollar-denominated assets.
- Currencies tied to the dollar could face serious inflation.
- If the dollar begins rising in value:
- Goods from other countries would enter our market.
- Raw materials would be cheaper in dollar terms.
- U.S. companies could face lower revenues as a result of the increased cost of American goods.
Federal Reserve and Ben Bernanke
- The Fed announced Wednesday it would keep interest rates at or near zero until the middle of 2013.
- By keeping short-term rates low, the yield on long-term bonds is reduced significantly for two to five years.
- The logic is to force capital out of those bonds and into the equity market.
- The Fed will likely purchase more Treasury bonds with maturing debt from its balance sheet.
- A third round of Quantitative Easing or QE3 has not been initiated, but it has not been ruled out either.
- The Fed could continue to purchase maturing Treasurys as a form of easing.
Comparing Europe to the Financial Meltdown of 2008
- European exposure to high government debt loads is causing the turmoil overseas, not a lack of liquidity.
- It is a difficult situation for the eurozone since countries in the E.U. lack the ability to manage their monetary policy independently.
- In 2008, many our financial system’s problems were residuals from being so heavily levered, particularly how it related to the housing market, structured finance products, and the failure of two large investment banking houses.
- Economic growth is growing, albeit slowly, not contracting like in 2008.
Interest Rates
- The two-year Treasury rate fell to another all-time low of 0.18%, down 0.11% for the week.
- The five-year Treasury dropped to an all-time low of 0.92% on Wednesday, but settled at 0.96%.
- The 10-year Treasury made a run at a new low, but corrected to 2.21%, down 0.35%.
- The 30-year Treasury yield continued its slide to 3.58%, falling close to 0.75% in a few days.