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?