Weekly Commentary: S&P Downgrades U.S.

August 8, 2011

08.08.11

Last week the DJIA declined 5.75% reflecting concerns about the strength of the U.S. economic recovery and the continuing worries over European debt and global economic strength.  On Friday, the July jobs report was better than expected with a total of 117,000 jobs created.  Nonetheless the current rate of job creation is not sufficient to bring down the unemployment rate which remains above 9%.

The big news on Friday was the S&P downgrading of the U.S. debt credit rating from AAA to AA+ stating that “the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

Despite the downgrade U.S. treasury prices strengthened as they continue to be regarded as a safe haven in uncertain times. Hopefully, this downgrade will put pressure on Washington to get our financial house in order.

The stock market has entered a correction with a decline of more than 10% from its previous highs in April of this year. For long-term investors this presents an opportunity to rebalance portfolios and add to quality stocks. The DJIA currently sells at 11.5 X next year’s earnings and yields 2.65% versus the 10-year U.S. treasury yield of 2.5%.

“To refer to a personal taste of mine, I am going to buy hamburgers for the rest of my life. When hamburgers go down in price, we sing ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up, we weep. For most people, it’s the same way with everything they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

– Warren Buffett