Last Monday, the debt ceiling crisis dominated the finance news cycle, and this week the credit downgrade is making top headlines. Although Moody’s and Fitch didn’t change the U.S. credit rating, S&P decided to downgrade the nation’s rating from AAA to AA+ after trading hours on Friday. As was the case with the debt ceiling crisis, I want to know how this downgrade is going to affect me personally.
Like many Americans, my husband and I have retirement savings invested in a variety of mutual funds. The stock market opened down several percent this morning, and so right now our retirement portfolio is going to take a hit. However, we won’t need access to those funds for several decades, so we can just sit tight and ride this one out.
On the other hand, baby boomers may not be in a position to just hold on tight during this crazy stock market ride. This SmartMoney.com article examines the downturn of 2011 and how it may affect investors in their 50s or 60s:
“For baby boomers, it's got to feel like the worst kind of d j vu. Last week's startling slide is just the latest dose of volatility to puncture their portfolios; not as wild as the 2008 crash -- at least not yet -- but just as sudden and unsettling. And it comes at a time when investors' 401(k) balances, on average, had only just returned to their pre-crash levels. If the correction endures, advisers say, it'll be particularly tough for those who are close to retiring, or just recently did so.”
Let’s face it; the housing market has not made a recovery on a national level. Sure, some areas of the country have healthy housing markets, but several major metropolitan areas are still trying to climb out from the housing bubble burst. Will the credit downgrade slow this recovery?
The credit downgrade could raise interest rates across the board. The U.S. government won’t be the only one paying a higher interest rate to borrow money; everyday consumers, you and I, may as well. This means that your credit card rates could go up and auto and home financing rates could rise. Although the U.S. credit rating has already been downgraded, there is no guarantee that interest rates will rise. In 2001, interest rates in Japan were lower after the credit rating downgrade than they were prior to the downgrade.
Even if the downgrade has no impact on interest rates, maintaining consumer confidence and the government’s ability to deal with the economy is a very real concern. When consumers are concerned about the economy, they tend to save cash instead of spend it. Consumer spending helps spur economic recovery, and a drop in spending could have a noticeable impact on the nation’s economy.
Consumer confidence was just one topic covered in an Associated Press article on the credit downgrade and investor anxiety:
“Economists say the downgrade, the first since the U.S. received the top rating in 1917, will rattle consumers and businesses already worried about the weak economy and the U.S. political system's inability to handle the country's problems.”
I admit I’m a bit concerned about the credit downgrade, but I’m going to take a wait-and-see approach before I make any major changes in my daily financial habits. How about you? Are you changing anything after the S&P downgrade?