As the markets continue to roil in the aftermath of the country’s credit rating downgrade, members are likely seeking safe havens for their investment choices.
Scott Powell, managing director of the general account for CUNA Mutual Group’s MEMBERS Capital Advisors, offered that take on the impact of the recent string of investment and government fluctuations.
“For credit unions, this is a perplexing time. I believe members are swarming credit unions with liquidity. They want safety and security,” Powell said. “At the same time loan demand has been very weak.”
For members, there could be tremendous buys for people who want to own stock at the current prices, Powell said. However, he cautioned investors and institutions not to make “knee jerk, panicked decisions.”
“Paper losses turn into real losses when you sell. This level of volatility can also drive people to make decisions that they may regret in the future with their long-term money. One has to assess their time frame.”
Meanwhile, the roots of the markets’ volatility, global debt concerns and the country’s credit downgrade go back a few years.
“Our view is we’ve been facing numerous global headwinds since the 2008 to 2009 recession. It was deeply driven by leverage as opposed to business cycle adjustments. We haven’t had one like the [Great Recession] since the 1930s,” Powell said.
One bright spot is corporations are financially sound for the most part and are in better health than before the last major financial crisis, he noted. But that could change.
“The challenge with recessions is they become self-fulfilling prophesies due to a lack of confidence,” Powell said. “It can lead to consumers not wanting to spend, retail sales fall and the GDP slows down. That’s what we’re trying to avoid.”
The flurry of activity started Aug. 4 when the Dow Jones industrial average plunged 512 points, making it the worst drop since the 2008 recession. From there, the markets continued to rollercoaster. A mixture of sustained uncertainty on the economy, sluggish unemployment figures, financial crisis fears in other countries and the threat of another recession here in the United States caused the Dow to freefall.
The following day, Standard & Poor's lowered the U.S.’s long-term sovereign debt rating a notch from AAA to AA+, also putting in place a long-term negative outlook rating. Since then, threats of a recession began to loom and markets worldwide reacted.
For the most part, the downgrade should not have been a surprise since S&P has more than hinted of its pending action for a few weeks, said Brian Turner, director of advisory services at Southwest Corporate Investment Services, a wholly owned CUSO of Southwest Bridge Corporate Federal Credit Union
“They specifically pointed to the need for the federal government to agree on a sizeable deficit reduction package over the next ten years for the U.S. to retain its AAA-rating. In their assessment, last week’s budget compromise fell short of that goal.”
Usually with a credit downgrade, expected debt costs increase as investors expect higher returns, Turner explained, adding there’s no certainty that there will be immediate higher mortgage or consumer rates or wider spreads on agency debentures and agency-issued mortgage-backed securities collateral. Turner said if that does occur, it wouldn’t necessarily be adverse to credit union balance sheets or earnings.
“If we experience lower rates or an extended low environment, shares will continue to flow into institutions and member demand will determine whether funds are employed in loans or investment assets,” Turner said.