Two years ago today, on a Friday afternoon after the market close, Standard & Poor's downgraded the U.S. credit rating from AAA to AA+. Stemming from a wildly contentious debt ceiling debate, it was the first time in history any ratings agency had dared suggest America's debt was anything other than risk-free.
It's hard to remember but at the time the downgrade was a huge deal. Every major newspaper ran the story on its front page. The Financial Times called the downgrade "a contentious and historic move that highlights the weakened financial stature of the world's most powerful country." Time magazine featured a cover of George Washington with a black eye and the caption: "The Great American Downgrade."
The stock market lost its collective mind, falling nearly 7% the following Monday alone and nearly 17% in the three weeks surrounding the downgrade. Curiously the bond market didn't seem to care about S&P's downgrade at all. On August 5, 2011 the yield on the U.S. 10-year Treasury was 2.56%. When the market re-opened the rate fell to 2.34%.
Two years later the 10-year Treasury is yielding 2.63% and the S&P 500 (^GSPC) has gone from 1,119 to over 1,700; an incredible 52% gain.
Part of the bond market's lack of reaction was anticipation of direct intervention by the FOMC to keep rates low. Keep in mind that the Federal Reserve was already pushing rates artificially low before the downgrade and has only accelerated their efforts in that regard since. S&P didn't do anything to change that stance.
"We never did go bankrupt, we probably were not really that close," says Jim Paulsen of Wells Capital Management. "We kind of plodded along with growth before and since then we're now back to where we were in the bond market and a lot higher in terms of earnings, the stock market, employment and everything else."
Subjectively there are two major differences between now and 2011. First, no one really cares what the private ratings agencies think anymore. The same holds true for the government, at least in terms of the debt ceiling arguments. Neither body was particularly respected then. To the extent anyone thinks them now it's with contempt.
The second change is one of confidence. It's hard to even remember the level of fear overwhelming the country this month in 2011. Memories of the financial meltdown were still fresh. There was the very real sense that a double dip could become a reality soon and our elected officials would be cause of it.
The threats of a new recession are still very much real. Gross Domestic Product continues to slog along under 2%. The chance of a substantial and sustainable decline in stocks is also more likely now than it was in 2011. Markets tend not to crash when people are terrified. After two years, during which "buy the dip" has been the paying off beyond anyone's wildest dreams, Americans are flooding back into stocks.
If there's one firm lesson to be drawn from the debacle of 2011 and the S&P downgrade it's that nothing every really seems to change. We flood out of markets when we're scared, blithely throw money at stocks after huge rallies, and elect people with a near total inability to do their jobs.
Someday America really will be in trouble. It's just not going to happen when anyone expects it.
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