Markets with Bulls and Bears Pondering an S&P Downgrade
by J. David Lewis
It is time again to write about my thoughts on current events. When I started these newsletters, I promised myself I would not write them unless I felt I had something significant to say. For a few months I have not felt my comments warranted space in mailboxes. There was too much noise for a coherent opinion.
The line was, if a debt ceiling deal was not reached, our credit rating would fall, interest rates would rise and markets would react badly. On July 28, a journalist asked for my thoughts with two primary questions (“Knoxville Advisers Tell Investors to Hold Fast” by Josh Flory). What am I telling clients to help understand what it all means? And, what should they do about it? Frankly, despite all the noise in the media, we have not had that many clients asking these questions. When the article appeared, the two other advisors it quoted seemed to have many such calls. Our office discussed the contrast.
The article did a good job conveying advice to maintain portfolios developed in more rational times. I had told Flory we know there will be market crises. I have seen many in very personal ways. We do all we can to build portfolios we are willing to live with through whatever happens and commit to helping clients maintain strength. We publish this in Our Investment Philosophy and Disclosure – Form ADV Page 8 on our website with these words:
“Resource Advisory Services has an extraordinary commitment to holding portfolios through whatever market conditions prevail at any given time. There have been at least six market crises since the formation of Resource Advisory Services. It has been steadfast through all of those. It has weathered days when people were convinced stocks had to be sold, and then watched as markets recovered in ways that were far more dramatic than could be imagined on the worst days. When Resource Advisory Services felt pressures to “move into tech stocks,” in the late 1990s, it resisted very strongly. Resource Advisory Services does not restructure portfolios quickly under pressure.”
We avoid saying “if there is a market downturn” by using “when.” We do not want any false hope anyone might avoid frightening times. Appropriate asset allocation can affect portfolio volatility. Low risk allocation does not seem to help clients feel comfortable when there is disturbing noise. The owner of our most conservative portfolio was once very concerned about a relatively minor market event. We need to help anyone we can understand that shocking times are a part of life.
Near the end of my interview, to illustrate the effect of noise, I said a lot of people are talking about a debt downgrade increasing interest rates. For several years I have believed interest rates are almost certain to rise from current levels, without regard to the debt ceiling deal. They are far below my perception of normal. I remember economic volatility when studying finance during the 1960s. In 1980 I was a student again with the turbulent economic events of the 1970s and my banking experience as my background. Interest rates were much higher then. More reasonable interest rates are higher than now. Current rates are too low to sustain. This idea made it into Flory’s article.
The debt deal was reached. The next morning I read an S&P report about July’s exceptional corporate earnings, followed by news that General Motors profits increased 92%. Then the stock market collapsed. Interest rates went lower for now. The week ended with unbelievably good employment information. I remembered telling Flory that a bad deal on the debt is probably worse than no deal. The markets expressed their immediate reaction to the deal and seemed to ignore the good news.
Now, S&P has downgraded our country’s debt. On Sunday morning (August 7) I heard two political parties say the other had made the debt deal bad and S&P was not giving us justice. It is like fighting siblings when parents try to stop them.
S&P is only one of many organizations making judgments about our debt. China’s expressed their doubts clearly. I doubt China considered the S&P view. China did independent research, much as quality portfolio managers do independent research.
There are many bulls and bears in the markets for our bonds. S&P may influence some. The most important buyers and sellers want proof we can unwind our emergency and social excesses. It will not help to blame political parties or the bulls and bears. We have to actually do something. The markets, like good parents, are not much interested in excuses, whining or other noise.
Last September (2010), at Mount Rushmore, I heard a park ranger talk about the immense problems those presidents faced. He quoted Jefferson on a government that gives its people the ability to change the government as situations change, even to the point of replacing the form of government if needed. It is probably not time to talk about replacing this government. It is time to do all we can to insure that the leaders we pick will actually work on the issues that make our country stronger.
We are the people. We have the votes. We elected the politicians we have and should accept our personal responsibility in this. Prove to the bulls and bears of the world that we will now vote for those who can solve problems. Given the problems those presidents faced and solved, the current problems can be solved if the people have a coherent vision and really want the fundamental problems solved. In the meantime, I expect Resource Advisory Services to stand by the portfolios we have.
Contact J. David Lewis directly with firstname.lastname@example.org or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 54564