PARKERSBURG - Although the stock market has fluctuated over the past couple of weeks since Standard and Poor's downgrading of the U.S. credit rating, local financial experts are continuing to tell people focus on long-term measures.
Recently Standard & Poor announced it had downgraded the U.S. credit rating for the first time from AAA to AA+.
A report issued by Standard & Poor said the downgrade reflected the company's opinion the fiscal consolidation plan that Congress and the administration agreed to falls short of what would be necessary to stabilize the government's medium-term debt dynamics.
''More broadly, the downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned,'' the report said. ''Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the administration to be able to leverage their agreement into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.''
The stock market has reacted since then with significant drops and uncertainty. At one point, the Dow Jones Industrial Average dropped by 512 points and U.S. stocks fell around 15 percent, but have been coming back.
Randall Snider, president and CEO of Community Bank in Parkersburg, said the change in rating by Standard & Poor really did not have much of an impact overall.
Fact Box
About The Downgrade
Recently Standard & Poor announced it had downgraded the U.S. credit rating for the first time from AAA to AA+.
The company's opinion is the fiscal consolidation plan that Congress and the administration agreed to falls short of what would be necessary to stabilize the government's medium-term debt dynamics.
''It is just one agency of many,'' he said, adding a number of companies, such as Fitch, kept the U.S.'s rating at AAA with a steady outlook.
In theory, a decrease in an entity's debt rating should result in an increase in interest rates, said James Falter, chairman of the Department of Business & Economics at Marietta College.
''Speaking in terms of U.S. government securities, the required yields 'should' increase because there is more perceived risk,'' he said. ''Since U.S. securities are discount bonds, this is accomplished by decreasing prices and yields would go up.
''However, the market for financial assets (stocks, bonds, etc) is globally competitive and even with the downgrade by Standard & Poors, we have not seen significant pressure on yields. Even with the downgrade, U.S. debt is still considered a 'safe haven' for global investors.''
Snider said US interest rates have fallen, despite everything that has happened.
''The world still views the U.S. as a safe haven for their dollars,'' he said of investments from other countries.
Part of the fluctuation seen in the market comes from fear when people see their leaders in the media blaming one political party or another while not dealing directly with the problem, Snider said.
Falter said there are combination of issues that are impacting the world's stock markets.
''Here in the U.S., fear is driving volatility,'' he said. ''There are several indicators that plague the economy that are adding to the fear. including relatively high unemployment, a stagnating U.S. economy, concerns with the federal budget deficit and the ongoing debt, economic slow down in Asia and the increasingly problematic situation with sovereign debt in Europe.''
People need to pay careful attention to the relationship between federal debt and the total Gross Domestic Product, or the total value of everything produced by an economy, Falter said.
''As the ratio increases over the longer-term, the system faces situations that you see in Greece, Ireland and most recently, Portugal,'' he said. ''If the economy can grow, this concern is mitigated.''
Falter said keeping a rational and long-term focus is important.
''Rather than focus on daily swings in stock markets, which can increase fear, one should focus on long-term measures,'' he said. ''For example, most become very worried about their retirement plans.
''Assets held in these accounts are there for many years or decades and will incur periods of growth and decline. Keep in mind the long-term average return in U.S. stock market is around 9 percent, depending on time period and type of index.''
Snider said interest rates are at historic lows, and banks around the area are still loaning money and are continually looking for good loans to make.
''The U.S. has the strongest economy in the world,'' he said.
