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What Do the Blue-Chip Losses Mean for Investing Post-Downgrade?

Experience was insufficient during Monday trading as even the most seasoned investors had little insight into the long-term impact of the credit downgrade. It seemed obvious that we’re in

Experience was insufficient during Monday trading as even the most seasoned investors had little insight into the long-term impact of the credit downgrade. It seemed obvious that we’re in uncharted territory, as blue-chips, historically secure stocks plummeted in morning trading, shedding their long-earned reputation as safe bets. Some analysts argue this slump will be short-lived; that the current fear sweeping the markets will create buying opportunities and make bold investors very rich. Others are convinced an investment right now would be walking beneath a falling knife, an unnecessary risk in uncertain times.

The argument for the former is that the decision by other credit raters, Moody’s, for instance to maintain the rating at AAA will prevent economic paralysis for the nation. The downgrade is a mole on otherwise unmarred face, not unnoticeable but not worthy of too much concern.

The other team would suppose that yes, perhaps the downgrade is mole on the previously unblemished complexion of, but the threat of malignance should inspire caution. Perhaps, they would argue, it is be prudent to wait for the test results to return before casting it off as nothing.

Today, investors were siding largely with the latter team, driving down markets over 300 in early morning trading. The S&P has dropped 14 percent in the previous 11 sessions, categorizing the decline among the top-20 in stock market history.

With a single exception, the entirety of the Dow Jones slid lower on Monday. Bank of America (BAC) led the pack as the credit slash was coupled with the S&P’s downgrade of the Freddie Mac and Fannie Mae. Shares took an additional hit when the New York Times announced the American International Group Inc. (AIG) would sue the North Carolina financial institution for the tune of $10 billion in order to recoup losses on mortgage-backed securities. The potential $10 billion did little to help AIG, which was also sharply lower in trading.

Citigroup (C) was hardly doing better than Bank of America for the day as exposure to mortgages continued to weigh down shares. A security breach late on Friday that led to thieves accessing and selling the information of thousands of Citi credit card holders, did little to help matters. The most obvious driver of losses; however, was a subpoena from the California Attorney General’s Office that would involve the bank in investigation into mortgage securitization practices.

Naturally, the direct impact of a second recession on banking stocks led them to fall hardest among blue-chips today. Conversely major tech companies, which tend to have strong international business operations to dull the blow, were able to make it through the day alive. International Business Machines (IBM), Microsoft (MSFT), Hewlett Packard (HPQ) and Intel (INTC) all fell, but considerably less than many other companies listed on the Dow Jones. Intel, likely by virtue of its strong international semi-conductor business, was the least affected among tech components.

Other tech goliaths, including Google (GOOG) and Apple (AAPL) slid comparably. Shares of Google, are down near 7 percent YTD while Apple has managed to tick up over 12 percent even in spite of recent slides.

Coca-Cola (KO) was lower but stayed stable while Kraft Foods (KFT) sank more sharply.

Even Wal-Mart (WMT) which some could argue would thrive in a bad economy due to its discount prices took a hit today.

Pharmaceutical companies including Johnson & Johnson (JNJ) and Pfizer (PFE), were also struggling in spite of strong international business and product demand.

The breadth of the blue-chip weakness today could be interpreted as the beginning of a changing landscape: a new frontier in investing post-credit-downgrade where not even blue-chips are safe. Simultaneously, the test results could come back negative and the performance today could be the anxiety of the waiting period taking a toll and creating false symptoms.

Copper, base metals, and industrial commodities face bearish technical trends, but the fundamentals remain bullish.