Comments about S&P Downgrade and Market Reaction

Posted on Monday, August 8th, 2011

I am usually reluctant to respond to market events, especially bad ones, with commentary.  I think it just fuels the pessimism.  However, since S&P downgrades of the U.S. come about every other century, I thought I should at least throw out a few observations.

The market over the last few days has been ugly.  There’s no way to sugar-coat the obvious (although I’m going to try in a few paragraphs).  I’m not usually surprised by market moves, but I confess a little head-scratching on this one.  Other than some not-so-good economic news, there isn’t really anything new that would drive the market down, in my view.

Are we really surprised that Washington is dysfunctional?  Or that the U.S. government spending is out of control?  And that the fiscal trajectory is unsustainable?  This.. is.. not.. news.

Or maybe it’s just in keeping with normal markets.  “WHAT!?” you might say.  Stay with me here.  Let’s take a look at a chart showing the annual returns from 1980 (grey bar) superimposed over annual top-to-bottom market declines for each year (red dots).  Out of the last 31 years, 17 had a mid-year correction of at least -10%.  Of those 17, 11 of those years ended with a positive market for the year.  As of Friday, the S&P had declined just over 11% since July 7th, and 17% as of today.  So what’s different about this?  Possibly the quickness of the decline, but not much else.

Maybe, the market is leading the news, pricing information that is yet to be public, or this simply could be the short term risk that comes with long-term returns from markets.  In other words – it just happens.

Yes, I know, it’s different this time…but as I’ve said before, what makes this time like every other is that it’s ALWAYS different.

Can it get worse?  Yes, but we’re well within the range of “normal,” so our best counsel is to avoid getting caught up in the mania, and turn off CNBC (we’re watching it for you).

Feel free to call us with questions about how this impacts you personally.  That’s why we’re here.

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