S&P’s downgrade of the United State’s debt rating from AAA to AA+ (the smallest move possible) is not being taken well by the market this morning. Futures at around 6:30 CST showed the markets down by around 2%. Click here to access our current view of the markets – our five-year ETF charts with both their respective short- and long-term trend-lines. Last friday, we reduced our clients’ exposure to the markets further, cutting our international exposure in half in all portfolios and adding a “bear market” commodity ETF to both our PLUS and Tax Managed Growth portfolios. This bear market position is designed to profit from market declines and should help to offset some of the weakness that we’ll certainly see in other assets that – for the time being – we still hold.
All remaining invested positions are deteriorating markedly, two of which will be eliminated from our portfolios within the next 48 hours or so. The two that remain are still showing only the slimmest of support from the markets, and may also need to be eliminated in short order. It is likely that by mid-week, both our PLUS and Tax Managed Growth portfolios will either be market neutral (with little or no net exposure to investment risk) or very close. Appleton Group Portfolio is likely to reflect only 40% exposure to the markets by the same time.
But there may be quite a bit of downside ahead for the markets. With the loss of the U.S.’s AAA credit rating, the main driver of our growth for the past 30 years (cheap credit) has now been tarnished. It is our belief that while there is little danger of international investors (such as China) selling their treasury bonds en masse, it does represent a real change in our country’s ability to fuel growh by artificial means (see our post from last Thursday). Whatever your opinion of the debt-ceiling resolution, there is no mistaking the market’s response: not enough debt cut, not enough revenues to service our debt, and not enough fiscal flexibility to help in the case of another downturn in the economy.
The already fragile recovery will certainly be hampered by S&P’s decision, which ironically may be enough to send the global markets back into recession (which, frankly, never really ended). Our downside target remains as it has for years: Dow 7,000, which represents the bottom of the decade-long trading range for the markets. For the record, on Thursday of last week the S&P 500 (with all dividends reinvested) went negative for the third time since the turn of the century. We expect that our extensive cash and bear market positions will help to soften today’s likely declines markedly.