What Goes Up Must Come Down (Financial Week in Review, Aug. 1-5, 2011)
The closing bell brought an end to a dramatic week in the markets. Thursday was the worst day for stocks since the beginning of the financial crisis. The Dow Jones Industrial Average took a 512-point nosedive, and concerns about the European debt crisis triggered a large-scale sell-off. This news came as a surprise to many analysts who expected the economy to continue recovering. As Friday dawned, the sell-off spread to markets worldwide.
However, there are already signs of recovery. Blue chip stocks, although still finishing low, experienced an upswing on Friday thanks to news that the national unemployment rate fell one-tenth of one percent to 9.1%. Corporations such as Costco have remained strong, rising 0.30%.
For long term investors, sell-offs like this can present great opportunities – a chance to “buy low” for those who have the nerves to weather some volatility. As they say: “nothing ventured, nothing gained.”
On Tuesday, August 2nd, Congress voted to raise the debt ceiling, in part to avoid a default on some commitments. After weeks of political gridlock, there was some speculation that the debt ceiling might not be raised at all. (The national debt of the U.S. is currently hovering right around the 15 trillion dollar mark.)
Friday afternoon brought S&P’s announcement that it had lowered its rating of long-term U.S. debt from AAA to AA+, and indicated that the rating was unlikely to improve. S&P left its A-1+ rating on America’s short-term debt unchanged. Because the short-term rating has been affirmed at A-1+, money market funds which own U.S. Treasury Bills should escape relatively unscathed. S&P stated in their report that, “We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.”
The U.S. Treasury disputed S&P’s decision, citing the discovery of a $2 trillion USD discrepancy in S&P’s calculations. But, while acknowledging the mistake, Standard and Poor’s stood by their decision to downgrade. Fitch Ratings stood by the White House and affirmed their AAA ratings on U.S. debt. True to the fickle state their name implies, Moody’s also backed the White House by affirming their AAA rating, but added that they may decide to downgrade the rating in the near future.
Despite speculation that the lowered rating may cause mortgage and interest rates to increase, for now, The Fed seems to be taking a “nobody panic and nobody gets hurt” stance, effectively saying that the change in S&P’s rating will have no effect. “For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government… will not change,” said a statement issued by the Federal Reserve.
Federal Reserve policymakers are scheduled to meet on Tuesday, August 9th, to decide what (if any) action to take.
The uncertainty in the market caused gold to rise even higher, to $1,663.40 USD per ounce. Oil prices fell, with U.S. crude slumping to $83 dollars a barrel, but the national average price of gas remains high at $3.67 a gallon.
Perhaps not surprisingly, chocolate sales are booming. In 2008, the first year of the recession, chocolate sales increased by 2% over the previous year and have been climbing ever since. New chocolate markets are emerging in Asia and Eastern Europe, but the North American and European markets are expanding as well. Chocolate has become a recession remedy – an affordable luxury and a “comfort food” in uncertain times. Even as demand for chocolate increases, candy bar sizes are shrinking and retail prices are increasing; chocolate manufacturers are making the most of the recession mindset. Yet, even cocoa prices fell with the market on Thursday, on expectations of a substantial cocoa harvest this year.
The Nikkei closed at 9,299.88, down 3.72%, and the Shanghai SE Composite Index fell 2.15% to close at 2,626.42. The UK’s FTSE 100 fell 2.71%, slightly less than the DAX but more than France’s drop of 1.26%.
The Dow Jones Industrial Average closed up 60.93 points, some 0.5%, to 11,444.61.The S&P 500 Index closed at 1,199.38. The Nasdaq Composite Index fell 23.98 points, or just under 1%, to finish at 2,532.41, still experiencing its worst week since the beginning of the recession.
There may be nothing to fear but fear itself. But you might want to keep a chocolate bar handy.
Full Text of Standard and Poor’s Global Credit Portal
And how will dollar behave on that news?
I guess everyone sees how it behaves 🙂