I have gotten many calls in the past few days, more focused on the S&P downgrade of US debt than on the fall of the stock markets around the world.
First of all, I think the action in the equities markets is more important than a rating from S&P.
Even Friday with the Dow closing up and the S&P about flat, NASDAQ was down and the Russell 2000 was down over 1.5%.
Very quietly the Russell 2000 has lost over 15% of its value just since July 22 – this is the great untold story in the financial news.
The Russell 2000 is a small cap index but as its name imply there are 2000 stocks in this index and most of them are more domestically focused and less reliant on Europe than the giant companies represented in the Dow – yet we are told to believe most of the reason for the worldwide market decline is Europe.
The Dow is only 30 companies – and tends to be composed of safer, more defensive names than most of the market, so it is hardly representative of equity markets as a whole. There are four American companies which have a AAA credit rating, meaning they now have a higher credit rating than the United States, three of them are in the Dow.
The Dow also contains many “defensive” plays like McDonald’s, Coke and Proctor and Gamble that people flock to when they are worried about recession – staple stocks.
I think the action in the Russell 2000 is more important than the action of the Dow. The Russell 2000 has had an amazing run off the bottom and is now reversing hard and that is important.
As for the S&P credit rating issue, I don’t expect rates to rise much because of this. Japan lost its AAA rating years ago and in fact, a decade ago S&P rated Japan sovereign debt lower than Botswana and look at how low rates are for Japanese bonds, they are lower than ours currently by some magnitude. My only concern would be if the rating changes triggered contractual actions, something I addressed in my latest blog entry.
In most cases, and S&P rating change won’t trigger an avalanche of events so long as Moody’s retains a higher ratings because most mutual funds and other things driven by credit ratings are allowed to take the higher of a split rating. If Moody’s follows S&P, we may have a larger problem.