When the US sneezes the world catches cold

The US economy is expected to witness growth rates of 1.5% to 2.0% which is about 0.5% lower than what was previously expected. The US economy needs to log in growth of 4% in order to bring down bring down the unemployment rate to 6.0% which is considered alright by economists. The unemployment rate for the US stands at 9.1% in July which is an improvement over the June figure of 9.2%. Although the latest job data has shown improvement the economic growth logged in by the US has fallen for four consecutive quarters and is likely to be anemic for sometime going forward.

Standard & Poor stripped the U.S. for the first time of its AAA rating. The U.S. has held on to its triple A rating since 1917 and had faced the chances of downgrade from rating agencies only once in 1995 when Bill Clinton was the President. S&P downgraded the U.S. government's credit rating as it felt that the recent plan worked out to raise the federal debt ceiling fell short of what is needed to stabilize the long term finances of the country. S&P was the only rating agency amongst the big three to downgrade the US debt rating to AA. Fitch Ratings and Moody's Investors Service have decided to retain their AAA rating for U.S. debt for now.

While Fitch has refrained from commenting on downgrade, Moody warned that they would also follow suit by 2013 if the US didn't do more to reduce its debt which stands has gained mammoth proportions and stands at in excess of $14.3 trillion.

As far as negative impact on equity market is concerned we feel that the movements caused by the downgrading would be temporary in nature and after the dust settles markets would once again focus on fundamentals which remain reasonably strong.  We would urge investors to make investments in the market in a gradual manner as stocks are available at very attractive valuations.  The only caveat to making investments at this juncture would be that one should have a long term view on the market as the volatility is likely to continue in the short term at least.

In words of legendary investor Warren Buffet “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

By Rajat Gupta – Research Analyst – Concept Securities Pvt. Ltd