The Double Entendre of a US Credit Downgrade

Recent news has been dominated by the decision on the part of Standard and Poor’s to downgrade the credit rating of the United States government, due to their persistent budget deficit and lack of progress in pulling government spending under control. In response to this decision that was announced on August 5, 2011 there was persistent market turmoil that lasted for a full week. The impact of the market movements resulting from the downgrade presented a true double entendre for investors. Two meanings for the same event that spell despair for some and opportunity for others.

One of the first things to examine is the level of price volatility in the S&P 500 index leading up to, and immediately following the US credit downgrade. What can be very plainly seen is that the uncertainty associated with the diminished US government credit position pushed the stock market into very levels of volatility. Values would plunge down one day, rocket up the next, and continue the roller coaster ride across multiple days.

This volatility worried many investors. For many people, there was dismay over the fact that the stock market (represented by the S&P 500 Index) declined by approximately 10% from July 27th to August 12th. People watched the value of their retirement accounts fall by the minute, recover, and fall, recover, then fall again. The result of all this worry was that capital flowed into US treasuries as investors sought safety from the risks of the stock market gyrations. This flow of capital suppressed yields for the 10-year treasury even lower than its current levels that are already very low by historical standards.

This is where the double entendre comes into play. The despair of stock market investors became an opportunity for income property investors because the accumulated fear of stock market volatility drove capital into treasuries, which pushed down yields. These lower yields directly decrease the cost of borrowing for a mortgage. Thus, the seeds of opportunity emerge from the ashes of disappointment.

The factor that we all need to consider when viewing the market environment is how each difficult represents an opportunity and each opportunity can contain a difficulty. The tides of opportunity do not remain static … the ebb and flow in perpetual motion. The sector that yields the greatest returns today may not be the best tomorrow. The window of opportunity for one style of investing may open, close, and then open again propelling some to wealth and devastating others. Each person must learn to see the tide of opportunity so that they can make astute and informed decisions.

Action Item: Learn to see the opportunities that emerge from apparent difficulties and the difficulties that emerge from apparent opportunity. Become your own best advisor by learning the dynamics of markets and how shifting investor sentiments perpetually create a way for you to prosper.

The Jason Hartman Team

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