Big News, Yesterday!
In 2011 Standard & Poors the ratings agency cut the long term outlook on the U.S. from stable to negative. What does this mean? It means that S&P are signaling that they believe the U.S. economy is in a sick state and the stability of the situation has gone from stable to shaky.
The U.S. indices dropped an average of 1.1%, with possibly more to come. But is this new news? Not really, we have all seen the inability of the U.S. government to put together a cohesive action plan to tackle the serious economic situation they find themselves in.
Take for example the drama over the U.S. government shutdown and the last ditch attempts to curb spending before the deadline. We have seen the unemployment numbers, the almost uncontrollable debt numbers and the slow devaluation of the dollar.
So this news is not new, but it is political.
This is a warning shot to the government that they will be downgraded unless they come out with a plausible and realistic plan to tackle the spiraling debt cycle they find themselves in.
What would be interesting is if the bond markets start demanding the premiums they have placed on Portugal, Spain and Greece. Should this start to happen you will see action in Washington.
It is not the carrot that motivates the political parties in Washington. Standard & Poors, like the market participants themselves, believe the only way to get Washington working together is to use the stock market. This applies to every country not just the U.S.