Financial markets today look just how you would expect them to look on a hot sunny day in August. There’s not a lot going on. Take economic data, for example. We’re already three days into the trading week and the only reports of note so far have been JOLTs (which really isn’t really a market-moving report) and Consumer Credit. While the slowness of today feels normal, there was actually a time when things happened in August. A case in point? 2011.
Seven years ago today, financial markets opened the week sharply lower. The culprit behind the weakness was Standard and Poor’s downgrade of the USA’s sovereign credit rating from AAA to AA, ending a run of seventy years with the highest rating. The rationale for the downgrade was the rating agency’s reduced confidence in the government’s ability to manage its finances. If you don’t recall, leading up to that downgrade, Washington was embroiled in a showdown over the debt ceiling. The GOP claimed that it wanted spending cuts to accompany any increase in the amount of debt the US was authorized to issue, while Democrats claimed Republicans were playing politics and wanted an increase in the debt ceiling with no strings attached (as prior increases had been confronted in years past). It came right down to the wire, but at the end of July 2011, Congress reached a deal two days before the US would have been forced to default on some of its obligations. While the issue was resolved, financial markets were in turmoil all throughout the final days of negotiations, leading up to the debt downgrade, as well as after.
The downgrade actually came on the Friday before August 8th, when S&P issued a release after the close of trading on August 5th. It’s not only companies that wait until Fridays when everyone is out of the office to release bad news! Immediately after the downgrade, S&P received widespread criticism and was accused of playing politics. Who were they to suddenly question the ability of the US government to repay its debts when they had missed the biggest credit bubble in history just three years earlier? Critics argued that while Standard and Poor’s had no issue slapping AAA ratings on subprime CDOs during the housing bubble, now they questioned the ability of the US, which has a printing press at its disposal, to make good on its debts! Within a month of the downgrade, the President of S&P stepped down after the Treasury and Obama Administration questioned the methodology S&P used in their assumptions.
Monday, August 8th was plain and simple a bad day for US equities right from the start. At the open, the S&P 500 was already down 1.6%. Two minutes after the open, it was already down over 2%. By 10:30, it was down 3%. By noon, we were down close to 4% and still declining. Shortly after 2 PM, bulls tried to make a stand, but it didn’t last, and at 4 PM, the S&P 500 finished at its lows of the day with an ominous decline of 6.66%. How’s that for a start to the week.
All around financial markets, there were big moves. Strange enough as it sounds, treasuries actually rallied that day with the 10-year yield falling 24 basis points to 2.32%. From there, it continued to decline right through September as it dropped below 2%. Believe it or not, the yield on the 10-year was actually higher in the first half of 2011 than it is now, and at one point was above 3.5%.
The dollar also caught a bid in the days after the downgrade and by the end of September was near its highs of the year. Movements like we saw in treasuries and the dollar after the US debt downgrade prove the ever important fact that when it comes to financial markets, nothing is certain except the past.
Since the close on 8/8/11, the S&P 500 is up 138%, while the average return of stocks that are currently in the index since then is a gain of over 200%! During that time, five stocks are up over 1,000%, and none of them are Netflix (it’s ‘only’ up 970%)! A total of 37 stocks are up over 500%, while two-thirds of the stocks in the index have at least doubled. At the same time, just 27 stocks in the index are down. Think about it this way; after the close of trading on 8/8/11, if you picked any stock at random, you would have been more likely to pick a five-bagger (500%+ gain) than a stock that went down. Even more amazing is that you would have been ten times more likely to pick a stock that would double as opposed to one which would have lost money.
As bad as the market felt that day, in retrospect, it was a great buying opportunity. The big question investors have to answer for themselves today is that seven years from now if we look back on today, will we be able to say the same thing?