A simple answer is: “Did you look at your 401K and stock holdings today?” The stock indexes were down. The DOW was down 348 points (.98%), the NASDAQ dove (-310 points, -2.17%), and the S&P500 dropped 63 points (-1.38%).
What happened, and what should I do about it?
Caveat: This memo is not financial advice to any individual since everyone’s investment decisions are unique to their risk, liquidity, and yield preferences. Given the type of Keynesian money, they are investing (Transactions, daily need money for rent, car, etc., Precautionary, rainy-day money for illness, insurance, etc., and speculative money, if I lose it my lifestyle will be the same). I will cover this in more detail and explain the Hill Investment Cube in a later memo. This memo is educational.
What Happened?
The government borrows money to build things, sells bonds, and pays its debts with the money. Consumers across the Globe buy the bonds, understanding that they will get back the money at a stipulated time and be paid an interest rate of a specified amount at prescribed times.
The interest rate has two aspects. One, we must pay taxes to cover the interest rate; two, we can buy them and get the yield as an investment.
Bond risk rating companies determine the interest rate in part. The top three global ratings agencies, S&P Global, Fitch, and Moody’s, use the same system of letters, ranging from a maximum AAA rating through B, C, and D for payment defaults. S&P Global had already reduced the US
government bonds to AA+ from AAA several years earlier.
The ratings reflect a borrower’s economic and financial health. The agencies look at economic growth, tax revenue, government spending, deficits, and debt levels to determine their ratings for countries. These ratings are intended for use by investors to guide them in their investment choices. The lower the rating, the more investors are likely to demand higher interest payments from a borrower to compensate for the risk of not getting repaid.
Fitch lowered the US bond rating from AAA to AA+. Fitch said the last-minute debt-ceiling deal after months of shutdown had failed to convince it that Congress could avert future
calamities.
More money will flow to the higher-rated bonds, and less will go to stocks. The demand for stocks lowered, and prices dropped across the board due to panic and greed.
Fitch’s downgrade created a buying opportunity for stock investors with Speculative money.
There are several reasons for the market to recover quickly.
- The market had already discounted the “Goofy’s in Congress actions.”
- This week’s employment numbers (jobs created) significantly beat projections).
- The economy’s GNP continues to grow at a decent rate.
- One of the biggest financial firms (Bank of America) changed its forecast of a coming
recession to creeping inflation (the best stage of the business cycle) the same day. - Laith Khalaf, AJ Bell’s head of investment analysis, said, “It also might surprise some people given how the US economy is proving to be more resilient than expected,” referring to the fact that growth surged. The job market held firm over the second quarter of 2023.
In summary, lower ratings mean higher interest rate returns on bonds. That, in turn, lowers the demand for stocks and stock prices. In this case, Fitch’s lower rating led to a predictable drop in market prices. The smart money (whales, market movers, and mutual funds) waited for the economically uninformed investor to panic when prices dropped dramatically. At the end of today’s market day, prices began to come back and most likely will revert to a bull market in the coming days.
For the stocks and mutual funds I bought before today, I will simply keep them and wait for the recovery.
Buy low, Sell high.