Are we really shocked by Friday's US's credit rating downgrade to AA+ from AAA? It was a long time coming. Poor fiscal policies, Washington's slow reaction over the years, and the weight of so many government programs (medicare, medicade, and social security) only point us in one direction - down. So what does all this commotion mean to the individual investor?
For now, not much. Most opinion (myself included), seems to indicate that the US' large economy will keep it afloat for a while. Our recent drop to 9.1% for unemployment is also a step in the right direction for our economy. The US will continue to enjoy low interest rates on its debt, and investors will still see treasury bills as the safest place to invest. So we've still got some wiggle room before things really start getting rough.
What can we do to ride out the financial turmoil? Stay diversified. Right now the markets are very volatile, and won't be able to recover until we come to a solid plan to not only reduce our debt, but to tame the sources of it. Good options would be mutual funds or ETFs. If you're looking to make your own stock picks, it'll be wise to be wary of overvalued stocks. A P/E ratio above 20, and you're starting to get too pricey, and expectations for that stock's performance may be too high. Lastly, keep an eye out on the news. Our economic and political atmosphere feeds into market expectations, so when you can make some good predictions about the political atmosphere, you can probably roll that over to your understanding about the markets.
Personally, I think this economic and political atmosphere makes it a good time to start snapping up the cheap stocks that are out there. There are some good gains to be made, and there's nowhere to go but up. Who knows, your political savvy just might turn into surefire stock pick!
The newest story out there is that treasury bond markets are rallying despite the downgrade. Demand for AA+ safe debt is still there!
ReplyDeleteThis is interesting and probably indicates that equity markets are just panicking without cause (with the now 200 drop in the Dow). The SP downgrade was probably already priced in with the incredibly bearish week we had last week in equity markets.
I'd agree with your buy recommendation. The only question is, what securities did you go long?
Brian, good point about the treasury market. US debt is probably still the safest bet out there right now. Investors are not seeing any alternative debt to invest in. The major confusion is most likely due to the concept that the most liquid and widely used currency in the world is now not rated as the safest.
ReplyDeleteAs for the buy recommendation, I'll keep you posted on what specific buys I make. For now, I'd recommend taking a closer look at the biotechnology and US energy markets. With an increased focus on reducing our reliance on foreign energy sources, US companies stand to profit. With the increasing demand for medical equipment due to the large amount of baby boomers retiring in the next 10-15 years, the biotechnology and even the pharmaceutical companies need to increase their production capacities. Stock picks coming soon!