Status: Bomb Damage Assessment After a Panic Day
Today was a panic day that increased in intensity as more news of failed debt ceiling negotiations and pending US loss of its AAA credit rating permeated headlines.
As is typically the case in panic days, just about everything went down - even assets, which generally rise when others decline. Investors just wanted to pick up their marbles and go home.
Fundamentally and technically, there is no basis for panic. Politically, there is a good probability that the debt ceiling will be resolved, at least for the short term. However, the odds now favor the US being reduced to a AA credit.
When/if the debt ceiling is resolved; there is a good chance of a relief rally. When/if (but it now seems more like when) the US credit rating is lowered to AA, there is likely to be a setback for bonds, and probably for stocks.
The character and extent of a AA credit for the US is uncertain, however, but probably would result in some increase in Treasury rates, which in turn are reference rates for most other forms of debt (such as mortgages, car loans, business loans, etc.). That would slow down the economy.
The US stock market, nonetheless, is still in up mode. Today's impressive decline put the price of the S&P 500 back to a level that is essentially the mid-point of a flat performance so far in 2011.
Given that the media needs hyperbole to maintain ratings and viewership or readership, we must put greater emphasis on what is actually happening, and less on what is being said and written in sound bytes.
Our equity positions are primarily in large-cap, high quality, above average yield, persistent dividend growers.
In discretionary accounts, we are holding 25% to 30% cash and 5% to 10% gold, and maintaining existing equity positions, pending a clearer set of price behavior developments.