The Dow and S&P dropped sharply today but pared their losses by about 50% by the end of the session. This was the worst market drop in a month. The cause of the drop was a downgrade of U.S. debt by Standard and Poor’s rating agency to negative from neutral. S&P expressed concern over the management of the mammoth U.S. budget deficit and the ultimate ability of the US to repay its debts, or even continue to service the debt. Such statements were strong medicine for the markets but the market took it well to recover some at the end of the day. Still the statement by S&P was a shot across the bow of the U.S. congress. It appears that Congress just does not understand the severity of the problems the U.S. faces with its debt. S&P gave them a glimpse of what could come.
At the same time the equity markets suffered, Treasury bonds remained stable and the U.S. dollar rallied. Bonds and the dollar were strong because traders had been shorting dollars, betting on a further decline but sentiment shifted in favor of the dollars, so all of those who had been on one side of the boat rushed to the other side.
I believe the S&P statement was constructive in spite of the market decline. It should serve as a wake up call to congress. There is no doubt we have a difficult road ahead of us, which ever solution, Republican or Democrat that you chose. The question is not will the road be difficult, the question is what does the end look like? Will it be worth the trip?