NEW YORK — When Standard & Poor’s said it might lower its top AAA rating on U.S. government debt, the stock market fell sharply. Traders were worried that if a downgrade happened, it would send interest rates higher — and, in turn, raise companies’ borrowing costs.
But short-term investors were driving the markets Monday. For individual investors who are in the market for the long haul, a downgrade might not be as devastating as it seemed at first — especially if their biggest investment is in the stock market.
The downside of a lower U.S. credit rating would be another drop in Treasury prices. And they have already been falling because interest rates are expected to rise as the economy grows. But some analysts say stock prices would rise over the long term because they will have better returns than bonds and cash.
“For people who bought bond funds and think they won’t lose money — you’re wrong,” said Linda Williams, director of fixed-income investments for Minneapolis-based private wealth-management firm Lowry Hill. “When rates rise, those bond funds will be worth less than what you paid for them.”
Stocks, meanwhile, will look more appealing compared with investments that are losing value.
“The equity market may be the best alternative, and it could improve,” said Randy Bateman, chief investment officer of Huntington Funds. He noted that U.S. businesses have strong balance sheets with record amounts of cash — unlike the indebted federal government.
A U.S. downgrade would also likely hurt the dollar’s value. That would help stock prices of U.S. exporters because their products would be cheaper for customers buying in foreign currencies, said Philip Tasho, chief investment officer of TAMRO Capital.
“The federal government’s financial position is terrible,” Tasho said. “Corporate America’s is the best in a generation.”
