The extreme volatility that we are witnessing in the financial markets at this time inevitably raises anxiety among all investors. We wanted to quickly communicate with you to let you know that, once again, your accounts are weathering this storm very effectively due to the defensive positioning we have taken.
The latest catalytic event has been Friday’s downgrading of US sovereign debt by S&P from AAA to AA+. Although not without merit, the downgrade surely qualifies as an event of great significance and is exacerbating already very fragile financial markets throughout the world. Over the near-term, there will be pressures on both institutional and individual investors as they try to recalibrate what this means. We have read in the financial press concerns that S&P has made this move in an attempt to validate their business. Perhaps it is a result of pressure from Europe after their downgrading of sovereign debt in that region. Possibly they may have overreacted as a result of their previous miss of the sub-prime mortgage/real estate bubble in 2008 that has made them complicit in the first round of the financial crisis. Irrespective of the reasoning, the impact of this will take weeks, if not months, to work through.
However, we believe that the main story and the greatest risk to financial stability remains the sovereign debt crisis in Europe and its resulting potential impact upon both the European and world banking system. Unlike the US, where the world, despite the downgrade, is lining up to lend the Treasury money for 10 years at around 2½ %, several heavily indebted European countries have been unable to borrow money almost at any price requiring their central bank, once again, to backstop these entities.
Our concern now shifts to the probability that a 2012 recession is more likely as a result of the added uncertainty these events are creating. Pacific Wealth Management has your portfolio positioned to effectively weather this volatility and we are looking for opportunities that will inevitably present themselves. Please do not hesitate to contact us if you have any questions or concerns.