The Downgrade Was a “Sideshow”

Russell Investments analysts say that the market volatility of the past week was not reacting directly to the downgrade of the U.S.’s credit rating, but rather to the risk of a recession.  

Speaking on a conference call with reporters, Erik Ristuben, Chief Investment Officer, Client Strategies, said that investors are likely thinking about the zig-zagging markets as an affect of the debt downgrade. However, he believes the markets are more concerned about the risk of another recession.  With two negative “sentiment centers” – the U.S. and Europe – plus weak economic figures, investors feared that would be enough to push the country into recession.  Of course, the downgrade did not help these negative sentiments, but added to them.

Ristuben offered some words of relief for investors, saying the data since the downgrade announcement has not been consistent with a recession. Several economic reports that came out this week have had hints of improvements, such as retail and industrial manufacturing numbers, which came out on Friday. “These are definitely not robust numbers,” he emphasized, “but they are not consistent with a recession, and markets are starting to see that – they are willing to listen.”

Also on the call was Mark Eibel, Director, Client Investment Strategies for Russell Investments.  He said it’s important to put the events of the past week in context – how does this sell-off compare to others? Since the downgrade, the sell-off is close to 6%, he said, which is similar to last August, when Fed Chairman Ben Bernanke announced plans for the second Qualitative Easing, or “QE2.” The equity markets are down 10% year-to-date, which is worse than most sell-offs, but it’s still not the worst it can get.   

Eibel also analyzed how asset managers have been reacting to the market volatility. “It’s a balancing act between wanting to be cyclically-oriented and being a little bit more defensive,” he said.  Managers did get more defensive, but the urge to stick with the cyclical nature of the markets is still viable.

When asked if the country is headed towards another recession, Eibel noted that most mainstream analysts are saying we are not heading for a recession – which actually gives him pause, since conditions certainly remain volatile.