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Aug 12, 201104:24 PMInvesting

Downgrades, Debt Ceilings & Market Bears, Oh My!

Aug 12, 2011 - 04:24 PM

Unless you’ve been in hiding, you’ve heard something in the last few weeks about a little quarreling in Washington over the nation’s debt ceiling and something about a company deciding they don’t think our country’s debt is quite up to snuff. I thought I’d take a moment this week to break down what happened and what it might mean to you.
Last week, Congress & the White House came to a zero-hour agreement to raise the debt ceiling, allowing the U.S. government to cover its short term debt obligations. Think of it as raising the limit on your EXTREMELY maxed out credit card. While there were some cuts made in future spending, the greater challenge of creating long term, meaningful solutions was left to a Congressional committee, charged with presenting a deficit reduction bill to Congress by Thanksgiving.
Last Friday evening Standard & Poor’s, an agency that rates the quality of various securities, debt obligations, governments and other entities reduced its rating of the U.S. government’s long term debt from its highest rating tier, AAA to the second highest rating tier, AA+. There are varying opinions as to the validity of this decision, whether it was warranted or not and what it truly means for the economy, both in the U.S. and abroad over the long term. Standard & Poor’s ultimately felt the current plan for reducing the debt is far from sufficient and that it needs to see more action from the government before improving their outlook. As of this writing, the other ratings agencies have held the United States’ AAA status, but have warned that they, too, are concerned.
The world markets responded to these events in a very negative fashion on Monday, speeding up some already brisk downward moves from the week prior due to continued tension in Europe and slower than expected growth in various sectors here in the U.S.
Tuesday, the Fed released a statement confirming that interest rates will likely stay put for the foreseeable future. Along with some positive corporate earnings, this news drove the market up nearly 4% and the Nasdaq up more than 5% on an extremely volatile trading day. What’s left this week and beyond for the markets is anyone’s guess.
We continue to believe that the best defense in any market is to have a broadly diversified, low cost portfolio that is thoughtfully rebalanced to track with one’s long term goals and tolerance for risk. This crisis will come and this crisis will go. The same goes for the upswings. When they will occur is something that no one can tell you with any degree of accuracy, certainty or consistency. It’s tough to feel positive in the midst of so much uncertainty, but if you stick to a well designed, disciplined plan and stay focused on long term results, you’ll be prepared.

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com