It has been nearly a week since Standard & Poor’s announced that they were downgrading the United States’ AAA credit rating, and it is worth examining what the downgrade has meant to us so far. There were a number of theories regarding what might happen in the event of a US downgrade leading up to the deadline for raising the debt ceiling on August 2nd. These predictions and theories about the potential consequences of a downgrade were uncharted territory for economists, since the US had maintained an AAA rating since 1917. Now that the hypothetical has become reality, let’s examine a few key things that have happened in the past week.
One of the main concerns about a downgrade was that interest rates would rise as concerned treasury investors sold off their downgraded US debt holdings. Since the downgrade, however, market volatility has actually caused investors to sell off their riskier positions and purchase treasuries instead of selling them. With the current issues in Europe and Japan, US debt has continued to be viewed as a safe haven for investors as they flee from the markets. The buying has caused treasury yields to decrease, which in turn causes interest rates to decrease on loans such as mortgages. Mortgage rates have generally declined this week, leading to near historical lows and providing great opportunities for consumers looking to borrow or refinance.
Another concern was that commodity prices would rise on items like gold and oil as investors look to alternative options for safety. This has proven true in the case of gold, which has soared to record highs this week as investors purchased gold to help protect their investments from the market volatility. Oil briefly continued its recent decline in price before increasing several dollars per barrel the last few days. While this recent rise has been significant, the price remains lower than it was at the start of August.
Perhaps the most significant concern about the downgrade was that it would cause increased turmoil in already volatile markets. Anyone following the markets this week has seen this proven true. Following the expected steep Monday decline resulting from the downgrade news, the markets saw a sharp rebound on Tuesday, a huge decline Wednesday, and a large rebound again Thursday. This marked the first time in the Dow’s 115-year history that the index moved by over 400 points on four straight days. The news of the downgrade added one more item to the already significant list of things for investors to be concerned about.
While this is simply an examination of the short-term outcomes of the downgrade, this is by no means an indication of what the long-term effects will be. Many experts still expect rates to increase in the longer term, and there are widely varying opinions on where the markets are heading from here.
With all of these developments this week, what are your feelings on the current situation? Are you weathering the storm and staying the course, using this volatility as a buying opportunity, or taking a more defensive position on the possibility of further market turmoil?