U.S. Credit Rating Downgrade by Moody’s
We wrote about the U.S. financial situation a few weeks ago. We have been concerned about total U.S. debt levels, the cost of servicing that debt as interest rates rise, continued and ballooning deficit spending, and the percentage of total tax revenues used to cover interest expenses. The reality is things are not good. Thus, we are not surprised that Moody’s on Friday lowered its outlook on the U.S. credit rating to “negative” from “stable” citing large fiscal deficits and a decline in debt affordability.
For us, the BIG questions are how does this end and what are the implications for investors and their wealth?
Firstly, we expect there will be a period of austerity ─ meaning reduced government spending and all the cuts in government programs that come with it. These things simply must occur, it’s only a question of when.
Secondly, there could also likely be a form of reorganization or financial reset for the U.S. Government and its financial workings and obligations. What this may resemble is hard to predict and beyond the scope of this missive. And lastly, what this means for our clients and their wealth is of paramount importance.
Our take is that corporations should be relatively immune from U.S. government fiscal challenges. While there could be bouts of heightened market volatility and lower levels of long-term economic growth, the financial performance of corporations should be relatively immune from government financial problems. The free market mechanisms in which corporations operate will provide capital to continue operating and growing profitably. Free-market mechanisms are inherently resilient and will provide a way forward. The implications for bond portfolios are more challenging. We think caution should be exercised with respect to government bond holdings. Shorter-duration holdings should be preferred over longer duration holdings.
We are managing our client’s portfolios in view of the potential implications of more serious issues arising from the U.S. government’s fiscal challenges. At the same time, we are genuinely excited about the prospects for technological advances within the broader economy. We look forward to helping our clients manage their wealth in view of these opportunities and challenges. As always, we thank you for your patronage and welcome your questions.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 index is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall.
The NASDAQ Composite is a stock market index of common stocks and similar securities listed on the NASDAQ stock market. The composition of the NASDAQ Composite is heavily weighted towards information technology companies.
The NASDAQ-100, whose components are a subset of the NASDAQ Composite’s, accounts for over 90% of the NASDAQ Composite’s movement, and there are many ETFs tracking its performance.
The Dow Jones Industrial Average, or simply the Dow, is a stock market index that indicates the value of 30 large, publicly owned companies based in the United States, and how they have traded in the stock market during various periods of time. These 30 companies are also included in the S&P 500 Index. The value of the Dow is not a weighted arithmetic mean and does not represent its component companies’ market capitalization, but rather the sum of the price of one share of stock for each component company. The sum is corrected by a factor which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index.
The Bloomberg US Aggregate Bond Index (^BBUSATR) is used as a benchmark for investment grade bonds within the United States. This index is important as a benchmark for someone wanting to track their fixed income asset allocation.
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