O.K., you've just read about Standard & Poor's (S&P) stunning and controversial credit rating downgrade of the U.S. Government, you've read information that it may cause, a large stock market decline, cause home mortgage and credit card rates to rise quickly, and who knows what else? And your head is spinning a little. What to do?
First, take a little advice from the old rock group The Kinks. (Yes, The Kinks.)
Stop. Hold on. Stay in control. (From The Kinks single, "Destroyer.")
Now, listed below is a Q & A that should address some frequently asked investment and financial questions related to the downgrade.
Q: They say the U.S. stock market could decline substantially, as a result of S&P's downgrade? Is that possible?
A: Indeed it is, but anyone who says they can predict with 100% certainty whether stocks will fall a lot or a little isn't being honest.
Institutional investors may conclude that interest rates will rise in the United States, increasing borrowing costs for businesses and consumers, and many other organizations/jurisdictions, which would weigh on corporate revenue growth and earnings growth. If all of that occurs, the Dow Jones Industrial Average could fall substantially.
Q: Should I sell all of my stocks then?
A No, if your investment horizon is longer than two years.
If your investment horizon is shorter than two years, you really should not be in the stock market, because short-term, a dozen idiosyncratic factors could push a stock down, and it would have nothing to do with the health of the company, sector, or U.S. economy.
If you plan to retire in a year or so, or if you anticipate needing some money for a major purchase/payment (home down-payment, child's college tuition, etc.) you may want to reduce your exposure to stocks, to capture the current stock value, and protect against a DJIA drop to 10,000 or even 9,000 or 8,000.
However, if your investment horizon is longer than two years, and you won't face a big purchase/payment soon, and you can tolerate the risk associated with stocks, the calculation is to remain fully-invested in the stock market.
Q: What about home mortgage rates or car loan rates? Should I try to lock-in a fixed rate now?
A: Yes. There is a strong chance that interest rates across-the-board will rise. The reason? If institutional investors conclude that, as a result of the S&P downgrade, the U.S. Government is a riskier investment, EVERYONE else just became a riskier investment too, which means lenders are going to ask for a higher interest rate for many if not most other loans -- home mortgages, car loans, personal loans, and credit cards.
Q: Does the S&P downgrade mean that U.S. Government bonds are not safe?
A: Absolutely not. S&P's decision is not universally accepted. Far from it. S&P made a decision, in part, based on its evaluation of the political climate in the United States, and needless to add, there are several different viewpoints on the subject. Others believe that gridlock between the Democratic and Republican parties may have run its course, and that there will be more cooperation in the years ahead between the two political parties on major issues/problems facing the nation.
Q: Some say this is another sign of the decline of the United States; you know, first the economy suffered a bad recession, and now its credit rating has been downgraded. Is that accurate?
A: Nothing could be further from the truth. S&P made a decision based on their evaluation of data points.
Billionaire Investor Warren Buffett -- one of the most shrewd, discerning, and successful long-term investors in the modern era -- believes S&P erred when it lowered the U.S. credit rating, Bloomberg News reported Saturday.
And the view from here argues, as well, that S&P was wrong, for the following reasons:
First, depending on how you value real estate, among other factors, the United States has roughly $50 trillion to $55 trillion in investment capital. That's fifty to fifty-five trillion dollars. Everyone talks about the national debt, but few people talk about the nation's wealth. It is a significant some of money, to put it mildly, and needless to add, the nation has the resources to solve its problems.
Second, the United States has the largest and most technologically-advanced economy in the world, with big intelligence advantages in science, technology, industry, medicine, agriculture, and in production.
Third, the mostly free-market U.S. capitalist system has a remarkable ability to adapt and reinvent itself. This flexibility has made the U.S. economy more-resilient -- it's restructuring right now -- and it creates new eras of growth. The economy has reinvented itself before and there's no reason to think the current restructuring won't be successful.
Finally, we come to the factor of the American people. Despite all of the nation's social problems and tensions -- and they are significant -- Americans have found a way to solve their problems and live together. It is far from a perfect society, but the inherent fairness and decency of the American people eventually shines through.
In other words, the U.S. economy will rise again, in good part because the fair, decent, and hard-working American people will rise again.
To be sure, the nation has many problems, but it has repeatedly, after discussion and review, found solutions to these concerns. And it will again.