Special Market Commentary

by Jim Baird on August 8, 2011

U.S. Debt Downgrade

Executive Summary

  • Late Friday evening, Standard & Poors (S&P) announced that it had lowered its long-term sovereign credit rating on debt issued by the United States of America from AAA to AA+.
  • The fact that Treasury debt was downgraded was symbolically noteworthy, but doesn’t meaningfully change the place currently held by the Dollar or Treasuries in the global pecking order overnight.
  • The structural deficits and cumulative debt of the Federal government is a significant problem that must be addressed over time, but the United States is arguably in a much better position than many other developed economies.
  • While it is likely that the market’s short-term reaction to this development will be negative, we believe that intermediate to long-term returns will be much more influenced by economic growth, consumer behavior, and long term policy decisions.
  • As always, investors should have sufficient liquidity to meet their needs and position themselves to be able to remain committed to their long-term strategy as embodied in their investment policy statement.

Late Friday evening, Standard & Poors (S&P) announced that it had lowered its long-term sovereign credit rating on debt issued by the United States of America from AAA to AA+, a historical first for the United States. In their accompanying comments, S&P specifically noted that they believed the deal recently reached in Washington to raise the debt ceiling “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” They also raised doubts related to the “effectiveness, stability, and predictability” of American policymaking and institutions, particularly in an increasingly challenging fiscal environment.

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