Who Cares What S&P Says, Anyway

Ron Gambassi
August 9, 2011

The news about the Standard and Poor’s downgrade of the U.S. credit rating has circled the globe with damaging effects to the markets. The Asian market began its decline Sunday night that cascaded through Europe and continued right through the U.S. Monday trading day as the Dow closed down more than 600 points.

Most of the objective analysts think the U.S. market decline has more to do with the economic troubles in Europe (i.e. they are facing what we went through in 2008) and the lack of real progress on the talks to curtail the U.S. debt. Still, this S&P downgrade is the equivalent of kicking someone while he is down.

So how much weight should we put on the S&P opinion? Maybe the answer depends on how much credibility you think S&P has after its role in the economic crisis of 2008. This is the same rating agency that was pumping up most of the garbage assets being sold around the world as collateralized debt obligations (CDOs) during the height of what became the 2008 financial crisis.  They awarded a AAA rating to truly “junk” assets. They probably did as much to cause the financial crisis as any of the large brokerage houses and thousands of mortgage companies that “looked the other way”. There were municipalities in Europe that suffered financial ruin because they bought CDOs on the basis of the nearly risk-free implication of a triple A rated investment.

S&P is getting all the attention now because they stuck their neck out on the U.S. downgrade but make no mistake the other ratings agencies, Moody’s and Fitch had just as big a hand in assigning top ratings to poison CDOs. So far, those other two agencies have quietly held a AAA designation on the U.S. credit rating.

How these three companies have stayed in business (and largely unscathed) is a fascinating matter. Michael Lewis in his terrific book, “The Big Short” offers an excellent analysis of the rating agency role in the financial crisis.

So what should an investor do amidst this market turmoil and economic malaise? First, ignore the opinion of Standard & Poor’s. Next, heed the advice of John Bogle, founder of Vanguard. He says, “Don’t just do something, stand there”. The worst “something” you can do is try to time the market by pulling out your money, going into all cash, or heaven forbid, going all “gold”. Riding out the storm is the best thing you can do for yourself. It worked in 2008 and 2009 (as it has many times over the decades). To help you feel better, the situation plaguing the U.S. markets today is nowhere near as dire as it was in 2008 when the banking system was on the verge of collapse. We got through it in 2008 and we will get through it today.

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