Market Selloff Over Done

Yesterday the major stock market indices were each down over 1%.  I feel that the market sell off was over done.  Ostensibly the decline was because Standard & Poor’s cut the credit rating outlook of the United States government to negative.  This is the credit ratings agency equivalent of a warning of an imminent downgrade.

The reason I feel that the sell off was over done is not because I feel that the United States federal government budgetary crisis is not a serious issue.  No, I feel that the reason the sell off was over done is precisely because it is very old news that the United States has a strained relationship to credit as created by an inability to properly budget.

I also feel that the credit ratings agencies, stung by their inaction during both the dot.com era bubble burst and the mortgage bubble burst, are more likely to have itchy trigger fingers.  That is, they are going to more quickly downgrade or change outlooks to negative for the next several years going forward in order to restore their reputations for objectivity.

[Note: the next section is an addition to the original posting.]

You could make the argument that a lower credit rating on U.S. federal government debt and the higher interest rates associated with that downgrade will raise the borrowing costs of all U.S. businesses.  However, U.S. businesses that borrow the most – the mega corporations – are sitting on record piles of cash.  That cash can finance just about any project that these businesses can imagine.  So again, the market shouldn’t have sold off.

[End of addition.]

Lastly, I also feel that the sell off was over done because the debt markets and stock markets are not the same market.  Duh!  Not only that, but within the debt markets, the U.S. credit market is not the same thing as the corporate credit market.  Duh!  That the credit rating of the United States would affect individual equity values is a little bit silly.  About the only argument that could be made that the federal debt market and the public equity markets are linked is that the U.S. government might raise corporate taxes in order to balance the budget.  But I would be extremely surprised if that was the path to fiscal sanity.

Corporations have a large and well funded voice that decries the raising of new corporate taxes.  That voice also says: if you raise taxes on us, we can’t compete and when we can’t compete we can’t hire workers.  When we can’t hire workers it hurts the little guy.  What do we, as individuals, have as a unified voice to represent us?  Exactly.  We don’t have a unified voice.  Therefore, a rise in taxes to help balance the budget is overwhelmingly going to come at the cost of the U.S. consumer.

In conclusion, the stock market sell off was a bit silly, frankly.

Jason