Usually I find it interesting to post things that are a bit out there and at times off the beaten path. However, today I feel it topical to discuss this Market that we all buy into. The market reaction in times like yesterday when the Dow drops 5.5% in a single day, even while knowing prior to last Friday’s S&P downgrade that such a downgrade was coming is based on fear. I am not sure if that is the way you want to be investing and putting away money for the future. Sure there are some safer investment options than others, but in the end you are risking and bartering your financial future based on fear, illogical at times reaction and incomplete information. Countries like Brazil, and China are doing well right now because they are doing what the Western World once did to gain it’s economic superiority, ie. actually create the things they consume within their own country. North Americans and Western Europeans have become reliant on numbers on a screen rather than created product in hand to determine wealth and well being. This type of system while leading to great sums of net worth is always at risk of crashing easily at the first sign of fear; reason being, there is nothing tangible to hold onto once the fear sets in.
Below is an interesting article about the Market we depend on to send our kids to school, and retire comfortably off of.
The Irony of the Market
By: Cheryl Costa
So last Friday, after the stock market had closed for the day, the credit rating agency Standard and Poor’s (S&P) downgraded US debt from AAA, the very highest level, to the next lowest notch, AA+. By doing so, S&P was saying that, in it’s judgment, the US government was at an increased risk of not being able to meet it’s debt payments.
That should be a negative thing right? But what happened in the market yesterday when the Dow fell almost 635 points? Investors bought more of the asset that was just downgraded or deemed to be more risky — US Treasuries and they bought a lot more. Demand was so strong that yields on the 10 year Treasury declined from 2.55 percent to 2.339 percent (as the price of Treasuries goes up due to increased demand, the yield goes down — there is an inverse relationship). Where is the rational thinking in that decision?
The short answer is that there wasn’t much in the way of rational thinking going on in the market yesterday. Investors started to panic and panic has a way of feeding off itself. Selling yesterday was widespread and I would argue, emotionally driven — which is always a bad thing in the investing world. Sure, there was a lot of unknowns in play yesterday — the debt downgrade, worries about European debt, political infighting in Washington. Feel free to pick your poison. However, the downgrade should have been a non-event. S&P has been warning for months that a downgrade could happen and even once it happened, it shouldn’t have been that big a deal. In recent years, Japan, Canada and Australia have all seen their debt downgraded and in those cases, the initial reactions were generally not positive but they definitely were not extreme either. In most cases, the cost of borrowing in those countries actually declined. So, this downgrade should have been something we could “roll with”.
What happened instead was that panic set in. Fear is a very hard emotion to ignore so investors felt like they had to do “something” and that something turned out to be selling. As any adviser will tell you, it is very important that you not let emotions drive your investment decisions. The thing to do in times like these is to really think things through. For most people, selling is absolutely the wrong thing to do. My advice to clients who called yesterday was to hold tight and turn off the TV. People who sell magazines and airtime know that fear sells so that is often the angle that is pursued. Don’t fall into the trap. Step away.