On Monday market chatter was all about the controversial S&P downgrade in which the ratings agency downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.
As you likely know, the downgrade triggered a flight to safety with gold and ironically the US dollar both higher.
And perhaps more visibly, the downgrade triggered broad selling with the Dow , Nasdaq and S&P 500 all lower.
Did the market get it right. In other words, did the downgrade really warrant the sharp decline in riskier assets, such as stocks? CNBC's Fast Money traders weren't so sure.
Instant Insights with the Fast Money traders
Trader Brian Kelly thinks the market did, in fact, get it right. He says the sell-off in stocks is warranted because “the downgrade will pressure the government to get its fiscal house in order. And that translates into slower growth – that’s why the S&P is down,” he says. And he adds investors are bullish on the 10-year because a better credit rating will improve borrowing costs.
OptionMonster Jon Najarian thinks market weakness is “more than a 1-day play.” He points to the big jump in the Vix as his 'tell.'. “Until we find out how the government will cut its debt a host of sectors could be in trouble – most notably the financials,” he says.
Zach Karabell is on the other side. He says in the modern world its global growth that drives corporate profitability and nothing in that arena has changed. He's particularly skeptical of the ratings agencies and reminds the desk that they were late to the party before. In his view they “distort market signals. Who died and made S&P god?” he says.
Trader Stephen Weiss thinks that the sharp sell-off may actually have little to due with the S&P ratings warning. Instead he points to a confluence of other events. They include:
- On Monday, OPEC said that oil is over supplied and oil prices are $15-$20 too high.
- Also on Monday, Europe’s financial woes resurfaced with financial markets increasingly convinced Greece will have to renegotiate the terms of its debt, because its economy cannot grow fast enough to service it.
- Over the week-end, China central bank Governor Zhou Xiao-chuan said his nation would continue tightening monetary policy for “some time.”
DROWNING IN DEBT – GOOD FOR THE ECONOMY?
Could a U.S. default actually be good for the economy and U.S. equities?
Find out why Institutional Risk Analytics managing director Chris Whalen thinks debt restructuring could actually strengthen the dollar and help the economy.
Watch the video now!