In light of the S&P downgrade investors should rest assured that Treasuries will be fine for the foreseeable future. The US will make timely payments and our creditors really have nowhere to go for now.
As for stocks, prices are getting a lot better. Mueller Industries (MLI), a strong company, dropped to $37 from $42. Another great durable business that is built for hard times, Emerson Electric (EMR), now trades for $43 off from $62.
Industry can't function without Emerson motors and tools. In nearly every product category, Emerson has the top market share. The shares yield 3%.
Yet it's likely stocks will face continued selling pressure. There appears to be an enormous overhang from the 2008 fallout that simply needed a few terrible headlines to spark the fire. The past few weeks of uninspiring economic data are tangible.
Any stock purchase today may likely cause some pain before profit. But trying to time stock purchases will also cause agony instead of profit. At $9 a share, Bank of America (BAC) shares were trading at 75% of tangible book value. Today shares are trading at $8. By the end of the day shares may be at $7 and they could likely go to $6 before getting to $18 in a couple of years.
But I would not underestimate the psychological effect S&P's decision will have on the markets for the rest of 2011. It could not have come at a worse time. The Fed is no longer providing stimulus, commodities are showing lasting signs of inflation and housing is still crawling at the bottom. Combined this creates a recipe that will likely subdue the U.S consumer, the catalyst for nearly 70% of U.S. economic activity.
If you have doubts about a company's ability to make money in such an environment, keep it out of your portfolio (unless the share price is already factoring in Armageddon).
For what's worth, this downgrade may be more of blow to stature than the economy. With virtually no safe-haven substitutes on the scale of US Treasuries, borrowing costs will likely not be affected, at least for now. And S&P expressly stated their major reason behind the downgrade is with the political gridlock they see coming out of Washington. If anything, the downgrade has basically made the 2012 election year a nightmare for all incumbents.
A New York Times poll conducted last week revealed that over 80% of Americans were dissatisfied with the job Congress is doing. By the end of today, that number could reach 100%.
Only four U.S. companies are rated AAA: Microsoft (MSFT), Automatic Data Processing (ADP), Exxon Mobil (XOM) and Johnson and Johnson (JNJ). But does that mean that Berkshire Hathaway (BRK.A), which churns out more than $1 billion a month in float, is at a higher risk of default?
The U.S. free-market system is still the gold standard. Unfortunately, being the best doesn't mean being perfect. And I think it's safe to say that Europe's problems are making matters worse. Now may not be the best time to go "all in" on US stocks, but those who have been patient with boring old cash may soon find a lot to get excited about.