Host Hotels
Host Hotels, which owns Ritz-Carltons in San Francisco and Phoenix, posted second-quarter funds from operations that beat the average analyst forecast by 3.1 percent on July 20, boosting the shares 2.6 percent that day. After the U.S. was downgraded, even a projection for the best earnings growth in six years couldn't keep the stock up. It has fallen 19 percent, the sixth- biggest loss in the S&P 500.
The plunge in U.S. stocks that began July 22 pushed valuations down as much as 27 percent by Aug. 8. That was the fastest drop in the price-earnings ratio in 18 months, data compiled by Bloomberg show. The benchmark index traded at 12.2 times reported earnings on Aug. 8., the lowest since the bull market began in March 2009, and it has been hovering around that level since then, as investor fear failed to subside wholly.
'Very Attractive'
"It's definitely appropriate to be worried, and it's normal for people to think about the closest precedent, which is the 2008 credit crisis in the U.S.," Chris Hyzy, the New York- based chief investment officer at U.S. Trust, which oversees about $360 billion, said in an Aug. 23 telephone interview. "However, there are vast differences between that time period and what is occurring around the world now, and therefore the markets have corrected too far, making these current levels very attractive."
Investors sold stocks in August and October 1995 on concern that budget negotiations would fail between President Bill Clinton and Congress, shutting the government. The dispute between House Speaker Newt Gingrich, a Republican, and Democrat Clinton prompted Moody's to review some U.S. government bonds for a downgrade in January 1996.
The average price-earnings ratio in 1995 was 16.6, 15 percent below its level in 1994, data compiled by Bloomberg show. As the debate over federal spending led to two government shutdowns that year, the S&P 500 ended up rallying 5.9 percent in November and December and went on to gain 48 percent by 2000.
Upside in Equities
The reduction of the U.S. credit rating gave investors another reason to avoid equities amid uncertainty about the political and economic situation in the world's largest economy, according to Andrew Slimmon, managing director of global investment solutions at Morgan Stanley Smith Barney LLC, which has about $1.7 trillion in client assets.
"The downgrade was just one more thing that caused investor anxiety to grow," Chicago-based Slimmon said in a telephone interview. "We've come to the point where the one question to be answered now is whether we are going to have anything worse than a mild recession," he said. "If we can avoid that, then there's obviously a lot of upside in the equity market."