Standard & Poor’s is taking a beating but it did everyone a favour by downgrading the U.S. government’s credit rating.
A downgrade is an embarrassment for everyone in Washington. Hopefully, it will spur the country’s politicians to get along and do something useful for a change.
The downgrade also highlights the obvious: As President Barack Obama says, everyone knows the U.S. has a debt problem. That’s the understatement of the century.
There are only two ways to fix the problem: Cut spending or raise taxes. But there’s not a politician anywhere that relishes doing either. Fortunately, the downgrade has given them the opportunity, and they know it.
Fear is a powerful motivator. When the stock market plummets, people get scared, and their resistance evaporates.
It’s like softening up the enemy with a bombing raid before moving in with ground troops. By the time they get there, the enemy is waving a white flag and kissing the boots of the victor.
After getting kicked in the teeth by the stock market, the voting taxpayer is in the same frame of mind. Paying more taxes and getting less in return suddenly seems much more acceptable.
Yes, the economy will suffer in the short term from government cuts and higher taxes. But both moves are constructive for the long term, and investors crave encouraging action, even if it’s not going to help the economy immediately. Besides, the market had already written off any hope of near-term improvement.
In fact, in true fashion, it probably did so too aggressively. Stocks should never move so precipitously in either direction as they have in recent days; when they do, it’s a sign to pull the trigger.
In this case it’s to buy. The markets are handing investors a rare gift. Stocks are suddenly getting attractive. The U.S. stock market has rarely been cheaper, at less than 12 times earnings and with a dividend yield that exceeds 10-year bonds. U.S. firms, you may have heard by now, have a trillion dollars in the bank.
The natural state of the CEO is not rest. That money will be put to use sooner than later.
Canadian stocks, with their heavy commodity weighting, are also a lot cheaper – and that too is a buying opportunity. The commodity boom will fluctuate, to be sure, but higher resource prices are here to stay. For some excellent reading on the subject turn to the last two market letters from Jeremy Grantham, the resident genius at GMO, the U.S. money manager. A highly abbreviated version of his viewpoint is that when you get a fleeting chance to buy quality commodity producers (particularly, but by no means exclusively, energy and potash), do it.
So let me name a couple of tempting possibilities (these are mine, not his).
First, there’s Exxon Mobil , the energy producer. It’s enormous, diversified (half its revenue comes from outside the United States), conservative and quoted at 7.5 times earnings with a decent dividend yield.
Second, Potash Corp. of Saskatchewan . (Full disclosure: I own the stock as of Monday.) It is well off its 52-week high. It’s the premier potash play in the world. It sells for less than 12 times earnings, although there’s not much of a dividend.
Both stocks might get cheaper before they recover. In 10 years, though, they’ll be worth a lot more than today.
Yes, there are lots of problems out there and economic growth is slowing, but it’s not slowing enough to warrant a massive plunge in equity prices. That’s just a reflection of the inability of most investors to stifle the urge to panic and see beyond the headlines. There are always bargains in the stock market, and the more prices fall, the more there are.
Sharp selloffs are almost always a gift; don’t let this one pass you by.
Fabrice Taylor publishes The President's Club investment newsletter, focusing on off-the-radar small to mid-cap companies trading at a discount to net asset value. He can be reached at firstname.lastname@example.org.