Treasuries Surge Upon S&P Downgrade

Last Updated Aug 8, 2011 1:04 PM EDT

Stocks are plunging again today in the wake of the Friday night downgrade of US Treasuries. For a change, analysts may be right in predicting a six percent sell-off today. But do we know for sure that today's stock decline is due to the downgrade?
It might appear obvious that this was caused by the downgrade but look how Treasuries are performing. The five-year US Treasury yield just dropped to a record low since the data has been tracked in 1962. The 1.07 percent yield is a decline of 0.18 percentage points.

So the market's reaction to S&P stating US Treasuries are now riskier is to make it significantly less expensive for the US Government to borrow.

What may be happening is that fear causes investors to sell stocks. Investors then put funds in something they perceive as safe. Historically, that has been the US Treasury Bonds. Today appears to be no different.

My Take
Stocks are down about 15 percent over the past 11 trading days. Panic is overcoming greed and cash is again becoming King, as it was in March 2009. Stocks had lost 55 percent of their value then before the 120 percent surge. Cash was the only major asset class to lose out on this gain.

Investing is risky and get use to this volatility. I don't know what the next few weeks will hold but I'll be buying more stocks if they continue to plunge.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.