On Friday, August the 5th the Standard and Poor’s credit rating agency downgraded the U.S. government’s credit rating from AAA to AA+. Since 1941, the U.S. has enjoyed its AAA status, but in light of the financial crisis and the extraordinary lengths the Federal Reserve has taken to try and stabilize our economy, there are concerns about the Fed’s long-term ability to meet its obligations.
Wall Street’s reaction to the downgrade on Monday was that of panic, judging by the huge sell-off. To confound the matter, the very security that investors were most worried about (Treasuries) seemed to rally for a bit. Are you confused yet? The next trading day saw a strong rally on news of the Fed’s extension of low rates until mid-2013, which gave a firm definition of the long-used “extended period of time” phrase that had eluded most analysts. This too leads to unpredictable markets. On the one hand, the Fed admits the recovery has lost steam and they recognize that they need to continue current monetary policy in an attempt to breathe life into the economy. Yet on the other hand, investors should be relieved that we have clarity over the target interest rate and how long we can expect such extraordinary measures.
Yesterday found the Europeans back in the spotlight with concerns over their debt issues. Investors, with fears in tow, are sellers of quality blue chip companies with healthy balance sheets.
What should an investor do? First, I recommend you turn off the 24/7 broadcast of CNBC and Bloomberg TV stations. Secondly, take a deep relaxing breath so that you can think better.
At the onset of all client relationships, we discuss the pros and cons of the stock and bond markets. We also try our best to determine a client’s risk tolerance and portfolio requirements. After agreeing on an asset allocation, we build portfolios of quality stocks, equity funds and bond funds with an eye to the long-run potential of the investor and his or her portfolio. We believe that, even during times of extraordinary events such as those that are taking place right now, if the asset allocation was correct at the beginning of a relationship, then it is still the right allocation despite these events.
In closing, some would argue that there are risks for another recession. Concerns such as fears of the 2008 recession might cause consumers to hunker down and employers to impose a hiring freeze. Admittedly, this could tip the scales. But it’s important to recall that investors may have already “priced-in” this into current stock prices.
A balanced approach that includes proper diversification and monitoring is the prudent thing to do. There is too much risk in swinging for the fences in an attempt at making a home-run. Investors who have a portfolio built on quality should fare much better in the long-run than those who try to time the market.
Neal Nolan, CFP(R)