The announcement that Standard & Poor had downgraded our credit rating to one notch below AAA left Wall Street tumbing and Republicans and Democrats stinging with a symbolic slap in the face. But the effects may only be temporary, said SMU economics professor Dr. Nathan Balke.
“I think that S&P downgrade probably did not have a large direct effect, after all it is just one agency’s opinion, and the market was pretty well aware of economic and political situation before S&P made its downgrade,” Balke said.
Balke did say that the downgrade and weak US economic grown, along with the government debt issues of large European countries like Italy and Spain has “contributed to the general level of uncertainly” about the US and world economy.
“Markets hate uncertainty and stock prices have reacted negatively to events over the weekend,” he said. “In fact, it is this uncertainty that has led investors to sell stocks, and buy treasuries driving yields lower, despite the downgrade.”
Balke said that it is hard to predict what will happen with stock prices going forward, but that the decline might present at opportunity to buy some stocks that are undervalued.
He said that while we are not technically in a recession, becuase current economic grown is positive (though quite low), our current conditions may signal another dip back into one.
“Clearly the market is uneasy about future economic prospects which might portend an increased likelihood of a recession in the near future, but remember stock prices also fluctuate quite a bit so they are not necessarily a reliable indicator of future economic activity,” he said.
I’ve put a couple of emails out to political science professors on the political impact of the downgrade. When they respond expect another post. Until then, here is an interesting article on how the credit downgrade may affect you.