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Posted on 6 August 2011 | 20,986 views

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.

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  • Jessica Johnson said:

    S&P Downgrade to Spark Black Monday Crash by Worst Stock Market Crashes http://bit.ly/oUToRz

  • John Smith said:

    Rating agencies are the same clowns who gave AAA ratings to junk mortgage securities and plunged the world into great recession. The rating agencies should have been tried and sent to prison for their criminal role.

    Now, the same rating agency is downgrading­ US credit rating, although USA’s debt to GDP ratio is much lower than that of Japan and many leading European nations like Germany and United Kingdom. How can anyone call Tea party “Patriots”­, when they have been responsible­ for downgrading­ of US credit rating for the first time in history by their reckless behavior?

  • Breck Stewart said:

    I'm having so much fun reading all those articles about how the loss of the US AAA rating on Friday will affect… http://fb.me/DuPITonx

  • Common Sense said:

    Tea party had nothing to do with the downgrade – get your head right. The downgrade is solely the responsibility of congress which refused to actually do any cuts – CUTS were never on the table. All they argued was a decrease in the INCREASE in spending. The bloated budget is still bloated. Tea party? The tea party actually wanted REAL cuts in spending. Had THAT been done, we would be on stronger footing, and there would be no downgrade (note S&P stating that a 10trillion dollar cut was needed to secure the US status, whereas congress only passed 900 billion over TEN years…) Tea party had it right whether you want to accept it or not.

  • Grim Fandango said:

    Tea Party?

    Talk about having your head right.

    The original Tea Party lasted less than 6 months before it was infiltrated and re-directed by the same criminals that are the republocrats. I know, I was there when the original Tea Party arose spontaneously out of a massive Ron Paul rally in Faneuil Hall in 2007.

    Ron Paul and his ideals and ideas were unwittingly the genesis of the real Tea Party, and he is running for president again, and receiving the same grass roots adoration along with the same media disdain he did the last time.

    Compare his steadfast stance on taxes, spending, government waste, drugs, guns, to those Poseurs now claiming to represent the Tea Party.

  • Maya said:

    As long as the USA is giving up its production power to Asia and basing its economy on financial manipulation and debt, I assume that the economic predictions will be dire and the US is heading towards another recession, big time!

  • Zero K Five.com said:

    S&P Downgrade to Spark Black Monday Crash by Worst Stock Market Crashes http://fb.me/H3T2CWP5

  • 38TRADES said:

    S&P Downgrade to Spark Black Monday Crash by Worst Stock Market Crashes http://fb.me/H3T2CWP5

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