U.S. Credit Rating Downgrade

Friday night after markets were soundly fast asleep, closed for the weekend, the Standard & Poor’s rating agency announced that it would be downgrading the U.S. credit rating from AAA to AA+. Sure enough, this move sparked intense debate as to what the overall impact would be. The question, “If the U.S. is not of the highest quality, who can be?” was bounced around.

Not surprisingly, the stock market tumbled heavily on Monday, opening and remaining lower throughout the session. Tuesday, however, stocks bounced back mightily and closed with a significant portion of the prior day’s losses returned. I expect to experience intense swings like this more and more going forward as trading happens so much faster in our digital age than it ever has in the past. While stock trading will require increasing speed and precision, I still believe there is place for the long term fundamental investor who buys on weakness in the market and holds through the downturns. That’s where I do and will continue to sit.

The credit rating downgrade, for what it’s worth, did not particularly tell us anything we did not already know. The U.S. has debt and spending problems, absolutely. The wording of the downgrade also indicated that the political posturing that prolonged the debt ceiling debate may also have lead to the downgrade. Yes, the U.S. is heavily inundated with political bantering. That said, the United States is a democracy. While the extent of the debate was a bit stifling, I’d be more concerned if there was no debate at all. The best thing we can do is try to take lessons out of what we’ve seen over the past few weeks (and particularly the past two trading sessions) to make ourselves better investors.

What can we learn from this volatility we are experiencing in the market? Capital gains or price appreciation in the stock market is incredibly fickle (not that we didn’t already know this). Judging the market based on the movement of share prices can be maddening as the markets bob and sway based on investor sentiment at any given moment.

While the media focuses on the price of the market going down, a dividend investor can focus instead on the rising yield of the dividends of the underlying companies. Investors and speculators can collectively decide where the share price of a company will go, but the board of directors, basing their judgment on the fundamental health of the company going forward, decides how much of a dividend to pay out to shareholders. A dividend increase represents a vote of confidence on the part of those who have been entrusted to guide a company into the future. A share price increase may or may not be indicative of anything positive a company has done. The share price may just be rising on the tide of the overall market and tell us nothing about the underlying company.

I intend to continue to keep my eye on stock market downturns only insofar as they provide me greater opportunities to buy the companies I want to own more cheaply. As noted previously, a company whose story hasn’t changed over the course of one trading session is simply a better value once its price has fallen during a selloff. Be mindful, be patient, and prosper.