Rating agency Standard & Poor’s lowered the country’s rating to “AA+” from the peak “AAA” which America had retained since S&P began rating the nation’s credit.
Although the Moody and Fitch rating agencies have made no motion to downgrade the U.S. credit rating, S&P found measures taken to control future debt did not go far enough.
“Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers,” S&P reported.
In addition to downgrading America’s rating, S&P tacked a “negative” outlook on the country’s long-term rating. The agency feels unless more action is taken, the country could lose its “AA+” rating.
“We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case,” S&P reported.
Cartersville based Edward Jones Financial Advisor Bill Chandler was not taken by complete surprise by the downgrade but remains confident in America’s economy. Though the loss of “AAA” rating is historical, it’s not solely to blame for recent market upsets such as those seen Monday when the Dow Jones plummeted some 635 points and nearly 520 again on Wednesday after short-lived gains recovered on Tuesday.
“The move was not entirely unexpected as Congress’ recent debt ceiling compromise fell short of the rating agency’s goal for more significant reduction,” Chandler said. “A downgrade does not mean a default. The U.S. credit rating is still of very high quality and while the downgrade may not have been a big surprise, the market impact that we’re seeing is a lot of volatility and what is fueling the fire is fear. Fear is fueling the decline.
“In addition to the downgrade, the stock market decline is due to ongoing concerns about slower economic growth and new worries about European debt. Europe’s current plans do appear insufficient to most to deal with the size of the problems, especially in Italy and Spain. ... Despite the worries about our economic growth, recent indicators continue to suggest, it is slow, but still positive.”
The stock market may continue to rise and fall with major losses but Chandler and Edward Jones, as a corporation, do not feel another recession is on the horizon. He noted that financial reform, both regulatory and voluntary, have strengthened the economy as cutbacks continue across the nation and corporate America posts stronger profit margins.
“While we don’t feel like it’s going to be a 2008 decline. The most important thing an investor can do is stick to your strategy. Invest in your strategy, not your emotions and don’t let your emotions, or fear in this case, change a long term investment plan.,” Chandler said. “A lot of customers I have talked to recently have seen this decline as a buying opportunity. To add good, high quality investments while they’re at cheaper prices.
“Keep these declines in perspective, recessions are normal. Not saying the economy is in great shape, mind you, but I think this could be looked at as a buying opportunity for many as long as your strategies are appropriate.”
Interest rates to remain low
On Tuesday, the U.S. Federal Reserve announced plans to keep key interest rates at near record lows “at least through mid-2013.” Century Bank of Georgia CEO Rick Drews called the Reserve’s move “unprecedented” and may not amount to purely positive outcomes.
“Normally in these announcements, the Fed uses more ambiguous terms like ‘for the foreseeable future.’ A statement that interest rates will remain at or below these already historic low levels is an acknowledgment that the economy will remain exceptionally weak for another two years at the minimum. Very low interest rates signal little or no demand for new loans and very low economic activity,” Drews said.
In Tuesday’s statement from the Federal Open Market Committee, the Reserve cited deteriorating labor market conditions, increasing unemployment and a depressed housing market among other factors as the need for continued low interest rates. Chandler sees this as a move to stimulate growth in a stagnant economy continuing the opportunity for renewed investment.
“They are serious about doing whatever they can to stimulate economic growth. I think they certainly realize that while it is growing, it’s growing at a much slower rate than a lot of people would welcome and would like to see, and are doing what they can to try and stimulate economic growth,” Chandler said.
Drews, however, sees a double-edged sword with the continuation of low rates. Although slight benefits may be seen, disadvantages will remain for those looking to profit from savings accounts.
“The reason people aren’t buying new cars or new houses is not because of interest rates. It is because people are concerned about their job and the prospects for economic recovery. When you are worried, you don’t take out new loans,” Drews said. “Since the recession began, however, consumers have begun saving again, at levels we haven’t seen for decades. Unfortunately, continued low interest rates have a very negative impact on savers, retirees and people who rely on the interest from their savings to live. The tiny upside to slightly lower credit card rates pales in comparison to the dramatic cut in wealth creation brought by low interest rates on savings.”