One of the biggest news this week ending 24th April was the credit agency Standard and Poors coming out to warn that there was a one third chance that America’s vaulted AAA credit rating might get toned down a notch over the net two years. The huge amount of debts chalked up by the government and the wrangling between the two parties which almost resulted in the budget not getting passed caused them to put forth this negative outlook.
But since it was just that, a warning, and they didn’t actually lower US’s credit rating. Markets only got rocked for all of one day, after which investors realized that nothing has really changed. Also, good news from the housing starts front, and Apple’s sterling earnings results drove markets right back up again.
US wasn’t wrong to spend the amount of money they did on those stimulus packages. It is showing dividends now with the US economy now back on track. While its true that every country needs to be financially prudent, when a country’s economy is in trouble and needs a boost, it’s the wrong time to worry about fiscal prudence. Look at the European PIG countries. Greece is facing as much as a lost decade of zero growth as the harsh measures aimed at balancing their budget was implemented almost overnight as a condition for them accepting a bailout. US is fortunate in that it is not in such a dire situation, nor will it have to worry about it. The USD remains the main dominant trading currency and China is unable to find any other entity or country which it can sell the 700 billion in US treasuries it holds. That means that US is the only country which can be print money, issue tons of debt, all to bring its economy back on track of recovery.
The long term consequences are that the USD will fall, but at this point in time, America doesn’t care about that. If anything, it makes their exports cheaper. There will also be a continued move of monies into Asia searching for yield, as investors factor in the relative fiscal strength of the Asian countries compared to Europe and US. Thus, Standard and Poors warning is just that – only a warning. It is unlikely that they would actually lower America’s credit rating. Even if they did, it would be something which all bond holders and investors have already known for a while by now, that US would never have warranted a AAA credit rating if not for its unique economic, military and financial importance globally.
Over the next one to two years though, I believe it will still be earnings that will drive stock markets. Already, as seen in the past few weeks, many of the issues like inflation, China interest rate hikes, oil prices, middle east unrest, Europe financial crisis, potential US economy weakness has all been seen to be well factored into markets already. And despite it all, corporate earnings have continued to grow. The latest, from Apple, showed that US companies, contrary to what people think, are actually racking in ever more money. Apple reported that earning almost doubled in their latest quarter. Needless to say, the stock price went up, and helped to drive the tech sector as well.
Technology is seeing a resurgence and I believe there will be a rethink. The iphone, the ipad, facebook and social networks are changing the game again, just like how the internet, the pager, the handphone, and the notebook first changed our habits and brought about the technology boom which peaked in 1999. These changes are far reaching and I believe they will drive the technology sector in a big way over the next 2 to 3 years.
I continue to like the Technology sector and my view on US and Asia hasn’t changed (even if Standard and Poors is now more negative). There was some profit taking in the previous week, which can only be expected after the strong surge in the aftermath of Japan’s triple disasters. But markets are well back on track now, and I strongly believe that the uptrend we will see this year remains intact. There is still time, we are still only at the start of this phase of bull run. But it will be a bull run, and by year end, I think we will be surprised by the extent of the market’s surge by then.
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