The recent Standard & Poor’s downgrade of the United States credit rating probably drew more negative sentiment than it deserved considering that the reasons for the downgrade weren’t exactly a surprise.
Dr. Bob Froehlich, Chief Investment Strategist at The Hartford, provided some good perspective on the history of government credit ratings as they relate to subsequent stock market performance.
“While the loss of the coveted AAA credit rating is certainly a black eye for any country, it may not be the end of the world for a country’s stock market. History is filled with many examples of countries that lost their AAA ratings, only to see their stock markets go on to post strong performance a year later. Here are a few examples to think about. On March 30, 2009, Ireland lost its AAA rating, and 12 months later their stock market was up 20.8%. On April 12, 1995, Canada lost its AAA rating, and 12 months later their stock market was up 18.2%. On January 19, 2009, Spain lost its AAA rating, and 12 months later their stock market was up 40.7%. On May 6, 1998, Finland lost its AAA rating, and 12 months later their stock market was up 55.8%. Finally, on September 12, 1986, Australia lost its AAA rating, and 12 months later their stock market was up 86.4%. The point I’m trying to make is that other factors besides a country’s credit rating influence stock-market performance.”
It’s tough to envision returns this large out of the U.S. stock market over the next 12 months but it is not difficult to see gains from here. In fact, it’s not a stretch to conclude that the stock market may be less risky than the bond market at the moment if your goal is to outpace inflation.
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA