Credit Rating Downgrade and Stock Prices: It was a Money Making Opportunity!

Show Me the MONEY!!

I don’t hear too many people talking anymore about how S&P downgraded the AAA credit rating of the United States. Remember that event? It wasn’t too long ago.

When it happened, it was a jolt that impacted many people. Even some people who barely follow the news had heard about this. Once that happened, it seemed like some kind of watershed moment that signified the potential peril that the economy of the United States was in.  Many people were concerned about the impact of the credit rating drop on the stock market.

The news hit on Friday, August 5, 2011.  I recall that weekend, people talking about how our terrible financial management as a country was finally having a clear impact, and that things would never be the same in the U.S.  There were probably a few people that feared an impending stock market apocalypse.

I mean, this just seemed so shocking: the United States credit rating downgraded from AAA?

Well, the following day of trading here in the U.S., Monday August 8, was quite turbulent. The S&P 500 dropped from 1,199.38 to 1,119.46, representing a 6.7% decline in stock prices.

Yeah, that scared the heck out of a lot of people.

I remember a conversation that weekend, where we were talking about how it was going to be that upcoming Monday. There was plenty of chatter in the personal finance blogosphere about it. We knew there would be some immediate impact.

That being said, there were some others that were really getting into a panic. A number of people talked about how stocks would plummet. I remember one individual talking about how he thought there might be a free fall. One blogger discussed pulling out of the market entirely, and putting money in cash.  Several of us tried to dissuade him.

Just over 2.5 months later, are we all talking about this? At all?

Now, I’m not minimizing what this downgrade represented. It wasn’t good. However, what I’m saying is that in reality, we tend to have short-term memories.

We just don’t talk about this as much anymore, in general personal finance circles. AAA companies in the market or not, this topic hasn’t been discussed as much. What was a crisis that got people panicked to the point of talking about pulling out of stocks entirely, is just not the hot topic of the day. The buzz – negative or not – is toned down quite a bit.

As of the most recent close, the S&P 500 stood at 1238.25. This is an increase of 10.6% since the S&P downgrade of U.S. Stocks.

Additionally, this increase means that the S&P 500 is actually higher as of this writing, 2.5 months later, than it was right before the credit downgrade. It’s actually increased 3.2% since then!

Think about it – despite all the panic, if you would have invested in the market right before the credit downgrade became widespread news, you could have seen your investment increase in value. Actually, 3.2% in just over 2.5 months is a pretty good return. We could have made money on this!

What does this tell us about how the stock market reacts to bad news – and then bounces back? Does the stock market overreact to bad news?

We actually saw a similar occurrence after the tragic Japanese tsunami earlier back in March 2011. The Nikkei plummeted from 10,254 right before the Tsunami (on March 11), down to a close of 8,605.15 two trading days later.  By March 31, the Nikkei was back up to 9,755. Clearly, there was a big bounce back in fairly short order – despite all the problems, including some involving nuclear plants. The markets there have since gone up and down (more down of late), but there’s no doubt that the market jumped back up off the canvas within no time after the events there.

My Questions for You:

Were you nervous about the markets after the credit rating downgrade news came out? Have you thought about this much less lately?

What do you think about the notion that the markets overreact to bad news, and these such times just might represent great buying opportunities?

Or, is that we just have short-term memory, and markets recover too quickly?

Comments

  1. says

    Or – there are no viable short term investment vehicles safer than the dollar. The Swiss were uncomfortable with the huge rush into their currency, and Japan… well, they aren’t AAA either. So money left the safety of Treasuries and flowed into the… safety of Treasuries. Watching yields drop further was one of the most interest market events in recent memory.

    Think it’ll happen again with one of the other agencies?

    • Squirrelers says

      MC – I’m in the same boat, though I don’t dislike myself for it :) Agreed, that it was a really good opportunity to load up.

  2. says

    The markets react to good and bad news which makes it particularly volatile. At times it appears to overact to information. I dollar cost average into the market every month. So I have made money because of the news and lost too. Overall

  3. says

    @Ray
    Honestly, I wasn’t nervous at all. I knew there was likely going to be a decline. It happened. It was not a big deal. I’m not a trader, so corrections like that have no real significance to my overall strategy.

  4. Cat says

    When I invest, I want it to be all about the product or company. I have no faith in the whims of the public. Good news: up 300 pts. Bad news: down 300. Pure nonsense. I understand this past week the markets were up due to HOPE that the Euro banks were to be salvaged and crises averted. Good luck next week.

    • Squirrelers says

      Cat – that’s a sound long-term approach, with individual companies anyway. If one is trading more actively, it might be worth considering that there are overreactions.

  5. says

    I did EXACTLY what you’re talking about! When the US’s credit was downgraded, I bought some broad-market ETFs! When the tsunami hit Japan, I bought some stock! Everytime there’s short-term jitters, I go shopping.

    I seem to have a knack for ALSO buying at the top of the market, so this seems to balance me out. :-)

    • Squirrelers says

      Paula – well, I suppose balance has it’s merits, right? At least you’re not trekking backwards! :) It seems like you see market panic how I’m beginning to view it – as being a short-term reaction that will either be proven to be an overreaction, or a reaction that will be forgotten at some point in the future.

  6. says

    Nope! I actually used the fall to invest! I didn’t get in at the lowest point (who does, right?), but it has come up quite a bit in the last couple of weeks. An excellent return in a short period of time. But, I am sticking it out for the long run – but that doesn’t mean that you can take advantage of a drop to buy in more.

    • Squirrelers says

      20’s Finances – I think that’s a healthy perspective that might apply to many people’s situations: think longer term, but be ready to take advantage of severe overreactions.

  7. says

    I loaded up on uranium mining stocks right after the Fukushima disaster. Most of them are still down, but one of them has doubled nicely on the strength of a pending takeover battle.

    • Squirrelers says

      101C – hopefully your purchases will be good long-term moves. Seems like that timing was fitting with this idea of buying when markets overreact.

  8. Sonya Landry says

    It seems like you see market panic how I’m beginning to view it – as being a short-term reaction that will either be proven to be an overreaction, or a reaction that will be forgotten at some point in the future. At times it appears to overact to information. I dollar cost average into the market every month.

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