S&P Downgrade to Spark Black Monday Crash
Once the stock markets get past the initial shock on Monday — August 8, 2011 — the “S&P Downgrade” may prove to be more glimmer then bust for stocks and Treasuries, alike.
Make no mistake: Monday’s market action is almost certainly going to be ugly but any drop in bond prices (and spike in yields) could very well be short lived. The glacial pace of economic growth and very real chance of a double-dip recession suggest U.S. debt will keep its safe-haven status — and borrowing costs will remain low.
After all, Moody’s and Fitch, the other two major ratings agencies, re-affirmed Uncle Sam’s top-notch credit score last week and as for S&P, the agency has been telegraphing its downgrade for months, giving the markets plenty of time to digest the possible implications and price in the news.
Some analysts are not so optimistic — Analysts are warning that Monday will not be an easy day for investors on the New York Stock Exchange as it could turn into a “Black Monday” market crash. However, the extent of the damage will surprise even the most pessimistic of forecasters as this would create a buying opportunity in the markets.
Warren Buffett, America’s most revered investor, says the nation’s credit score is still sterling in his eyes. Barring other shocks like a new problem in Europe, the S&P downgrade shouldn’t make a whit of difference, he says.
“Think about it. The U.S., to my knowledge, owes no money in currency other than the U.S. dollar, which it can print at will,” Buffett told a media outlet in wake of the S&P downgrade.
The action in the Treasury market during the debt-ceiling standoff certainly affirmed investor confidence in U.S. debt. Yields on the benchmark 10-year Treasury note fell as the Federal government came perilously close to defaulting on its obligations.
That means prices rose. In other words, appetite for U.S. debt actually increased as the government flirted with default. Weird, but true.
The Treasury’s safe-haven status was further affirmed by market participants over the last five days as stock markets around the world reeled.
The Dow Jones Industrial Average plunged more than 500 points Thursday, its ninth decline in 10 sessions. In terms of points, that’s the Dow’s ninth-worst day ever, the worst being a 777-point drop in September 2008. As a percentage, Thursday’s 4.3% drop doesn’t make the top 20. Black Monday in October 1987 stands far apart from other bad days in percentage terms, with a 23% plunge.
Meanwhile, money flowed into U.S. debt, giving the 10-year Treasury a gain of almost 10 percent over the same period.
Like it or not, the Treasury market is the biggest and most liquid in the world and investors, sadly, don’t have all that many options.
Tags: Black Monday, Black Monday Crash, Dow Jones Industrial Average, Dow Plunges, Europe, Federal Government, Fitch, Investor Confidence, Market Action, Moodys, October 1987, S&P Downgrade, Treasuries, Treasury Note, US Debt, US Dollar, Warren Buffett, Yields