Would a US debt downgrade hurt stocks?

October 17, 2013No Comments

Fitch, Moody’s and the Chinese rating agencies have recently threatened to downgrade US debt. That’s because, although the debt ceiling debacle saw a solution as of yesterday, what it amounted to was the can being kicked further down the road. Debt ceiling debate # 3 will be coming in January. Yay!

As stock investors, should we be concerned with a credit downgrade, should one happen? Well, Argentina experienced a significant downgrade by Fitch back in November 2012. I believe it was some 5 notches lower (yikes!). They say a picture paints a thousand words – so I’d recommend looking at the chart below. You can draw your own conclusions as to how significant a downgrade might be – at least to stock investors.


Steadily buying

I’ve been steadily buying over the past month’s weakness. My remaining cash will be legged into the market in the coming week(s). There is a phenomenon of “buy on rumour, sell on news” that often occurs with both individual stocks and the market. Given the rally we had coming into the debt ceiling decision, it would make sense that a “sell on news” pullback might provide further buying opportunities. Momentum indicators such as stochastics and RSI are quite overbought on the daily charts – the market is likely due for another short termed pullback. That should provide a final buying opportunity, and lead us into a strong winter “best 6 months” season. And hey, if we’re lucky, a downgrade of US debt by the credit agencies might inspire an Argentinian style bull rally!



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