Is S&P responsible for the stock market fall?

Written by: Shoaib Zaman

Is S&P responsible for the stock market fall?
Why are the stock markets falling just because S&P said US is now AA+?

S&P rating could have aggravated the fall in stock market but that would have happened either way. It was not unexpected. Some of the important factors that actually upset the investor sentiment, especially of the big ticket investors are as following.

1. The net employment data is not healthy. To put it in simple words, if you go around collecting the jobless data from each of the 50 states then it is a fact that private space has created lots of jobs but in the same period state governments and federal government have shut down many departments. So overall jobless levels in US has increased. One of the economist from the Indiana University of Pennsylvania said that the private sector will need to create twice the number of jobs to compensate for the shrinking government jobs. That"s the gloomiest realization so far.

2. GDP growth in the last three quarters of 2010 has averaged below 1 per cent, so its not comforting either for economic experts in US. Nouriel Roubini in an interview to foreign policy said: "Last year, $600 billion of QE2 [quantitative easing 2] and a trillion dollars of additional tax cuts and transfer payments give us a growth of 3 percent for one quarter. But growth [in the other three quarters of last year] was averaging below 1 percent."

3. There is a financial instrument called CDS. (Credit Default Swap). In the most simple sense, its a kind of insurance, if the creditor defaults then the insurer will pay the sum-assured to the CDS holder. This is private, non-regulated business. According to Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, the sum for insuring US treasuries has increased which shows a lack of confidence on part of the investors and this had been happening long before Standard & Poor's decided to downgrade.  

So there are no single factor that can be attributed to this. Also Stock markets have not shown much gain since January of 2011. The declining slope was there. What has happened because of the downgrade is that many small investors are reacting and the media has got new fodder to talk about on Television. Therefore, the pace of deterioration can get fast. 

If you would also like to contribute or ask us a question, then e-mail to money (at) oneindia (dot) co (dot) in. You can contact the writer at md (dot) shoaib (at) oneindia (dot) co (dot) in DISCLAIMER: The views expressed in this article are the views of the author and do not reflect the views of our company. does not take any responsibility for any losses incurred by investors who take their cues from the above article.

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