Average investors probably don’t like to hear it, but when it comes to reacting to major economic news like Standard & Poor’s U.S. debt downgrade on Aug. 5 — or even its downgrade of Fannie Mae and Freddie Mac on Monday — they’re almost always a day late and a dollar short. That’s what CNBC market guru Rick Santelli said on Monday from the Chicago Board of Trade, noting that individual investors lead busy lives, can’t get to their portfolios until 9 p.m. and then make changes to their investments on the basis of “some blog” they read.
Even if regular investors keep up in real time, however, it’s probably best for them to stand back and watch as Wall Street insiders try to stay ahead of the latest market bombshells. Like professional firefighters who run into burning buildings as others run out, they often act in direct contrast to the herd.
(MORE: How the U.S. Downgrade Will Change the Global Economy)
With that in mind, here’s a look at what Wall Street insiders seem to be doing, and why:
They aren’t panicking. Jim “Mad Money” Cramer was also on CNBC on Monday (it’s all hands on deck at the broadcasting outfit), and he told an interesting story about his visit to the Philadelphia Eagles’ training camp this past weekend, reporting that player after player approached him about the potential carnage coming out of the financial markets.
One player, echoing the sentiments of other individual investors Cramer talked to over the weekend, said he feared the stock market would fall by 1,000 points on Monday. But Cramer said that was folly and that he wasn’t having that kind of conversation with big institutional investors. Just get past today’s market, he said, and see where your opportunities lie tomorrow.
Vanguard Fund founder John C. Bogle echoed the same sentiment a few minutes later, saying now is not the time that professional fund managers should be making big moves (instead possibly making some incremental ones). Bogle said regular investors should adopt the same strategy.
Foreign investors are sticking with Uncle Sam. Bond-market insiders say overseas investors from China and Japan don’t seem to be fleeing U.S. Treasuries. Their rationale, as exemplified by Abdullah Karatash, head of U.S. fixed-income credit trading at Natixis in New York, is that there really is a new normal and that big bond investors will adjust. Karatash gets the early vote on the best quote of the day (maybe even the year) for his line to the Wall Street Journal on Monday that “double-A is the new triple-A.” For the Japans and the Chinas of the world, the U.S. bond market is still the best “safe haven.” As the Journal points out, the $9.3 trillion U.S. Treasury market far surpasses anything Germany or even the bullish gold market has to offer.
(MORE: Investment Outlook: S&P Downgrade Doesn’t Change a Thing)
That’s the message the professionals hit their clients with hard on Monday. “The U.S. Treasury sector remains the largest and most liquid fixed-income market in the world, with the greatest degree of price transparency and few genuine alternatives,” said BlackRock, the world’s largest money manager, in a note to clients.
Banks say the S&P downgrade isn’t really a big deal. Big bank analysts aren’t exactly lining up to leap off the Brooklyn Bridge over the downgrade. Analyst after analyst is out with comments that while the S&P downgrade isn’t reason for celebration, the move wasn’t unexpected and investors shouldn’t hyperventilate. For some flavor, here are two random samplings:
- Barclays Wealth chief investment officer Aaron Gurwitz: “The debt downgrade is a distraction, but we will, however, be watching market liquidity indicators, such as interbank lending rates and bid-ask spreads, very carefully over the next few weeks to see whether planners and market analysts missed some damaging impact.”
- JPMorgan chief U.S. equity strategist Thomas Lee: He calls the downgrade a “sideshow” and says that while it does increase short-term volatility, it’s not dangerous over the long haul. “We believe the medium to long-term effects of the U.S. sovereign downgrade are minimal, even as the short impact (next two weeks) could be turbulent,” he wrote in a research statement released on Monday.