(Bloomberg News) Shareholders in U.S.-listed companies can thank Standard & Poor's for making them $1 trillion poorer after the rating firm earlier this month lowered the grade on Treasury securities for the first time to AA+ from AAA. Now, some of the most experienced investors say the stock market losses make no sense.
While the benchmark index for U.S. equities dropped as much as 6.7 percent, or $1.03 trillion, since the Aug. 5 downgrade, 10-year Treasuries rallied the most in 28 months and the government was able to finance its quarterly debt obligations at the lowest interest rates ever. The S&P 500 fell to 12.2 times earnings the first day after the downgrade, the lowest since March 2009, while Treasuries have returned 2 percent since.
"One of the most perverse things I've seen in 25 years of doing this is that S&P downgrades the United States government, and investors' reaction is to run towards the securities that they downgrade, selling businesses without asking at what price," Kevin Rendino, a money manager at BlackRock Inc., which oversees $3.65 trillion in New York, said in an Aug. 23 telephone interview. "Equity prices have swung well too far."
For Rendino and Liz Ann Sonders of Charles Schwab Corp., selling that may have been justified turned indiscriminate following the reduction, creating bargains in equities. The Chicago Board Options Exchange Volatility Index jumped 50 percent to 48, the highest level in 29 months and the biggest jump in more than four years, the first trading day after the action was announced.
Edward Sweeney, a spokesman for S&P, declined to comment on whether the rating company's decision influenced investors' decisions to sell stocks.
The downgrade, which conflicted with Moody's Investors Service and Fitch Ratings, turned investors' focus from the 10th straight quarter in which S&P 500 companies topped analyst earnings forecasts. As of Aug. 8, per-share profits had increased 18 percent among companies in the index, with 76 percent topping the average analyst projection, according to data compiled by Bloomberg. Sales rose 13 percent.
The new rating from S&P, which cited "uncertainty" in the policymaking process, is the second-highest and puts the U.S. on the same level as Belgium and New Zealand, above Japan and China. Congressional Republicans warned in November, when outstanding U.S. debt totaled $13.7 trillion, that they would oppose raising the ceiling. Lawmakers agreed on Aug. 2 to boost the limit and adopt a plan to enforce $2.4 trillion in spending reductions over the next 10 years.
'Damage to Confidence'
"It did a lot of damage to confidence, which had been shaky anyway," Sonders, New York-based chief investment strategist at Charles Schwab, said in an Aug. 23 phone interview. Her firm has $1.65 trillion in client assets. "We had started to get a sense of a little bit of a lift for the economy in the second half of the year, and you just kind of wiped it out because of the lack of confidence in our political leaders. S&P reflected that with the downgrade, but what it ended up causing was a real confidence crisis, more than an economic crisis."
Demand for Treasuries surged since the downgrade, helping send the yield on the 10-year note, the benchmark for home mortgages and car loans, to a record low 1.97 percent on Aug. 18. The bonds have returned 3.1 percent this month, poised for the biggest return since December 2008, according to Bank of America Merrill Lynch index data through Aug. 23.