Getting through tough markets takes sense

By Dian Vujovich

If you happen to think that rich kids only inherit money and

Okay, if you’ve been long-term investor market volatility is something that you’ve come to expect. Simply put: It’s just the way of the money game.

That said, each new round of extended market volatility can stir worry and panic in even the most seasoned investor–particularly when it comes with a downgrading of America’s debt rating.

But heck, we as a nation will make it through and you, as an investor will too.
How much money you’ll have gained or lost by the time you need that money is anybody’s guess. Nothing new there as that’s always been the case.

To quell some investor concerns and fears, portfolio manager at BlackRock put their heads together and published a commentary, “Navigating Extreme Volatility & the Downgrade Aftermath”.

Here are a few nuggets from it:

-On Equities: “In the current environment, where GDP is approaching a withering pace of growth …The fact is that many US companies have business outside the US, many with emerging market exposure. They have been growing market share and benefiting from a weak dollar, as multinational companies’ profits are enhanced when returns are translated back into dollars. In addition, Corporate America has become exceptionally good at containing costs and raising productivity. All of this bodes well in the long-term for equity investors. From a historical perspective, the market has endured 11 sovereign debt downgrades in the past 25 years. The equity markets have risen in eight of those cases, with an average rise of 17% in the 12 months following those downgrades. Given the magnitude of the recent sell-off, we would expect an equity bounce of 6%-9% (1/3 to 1/2 of the 18% decline), which is characteristic of an oversold environment. Thereafter, economic data would become the key determinant of stock performance….Given the recent market moves, we see opportunity in US and Japanese stocks….”

-On Fixed Income: “Today’s fixed income market is not a simple investment universe. It is murky at best, with the European debt crisis and slow economic growth just two of myriad issues. We expect the after-effects of the recent events to weigh on investor confidence and make navigating the marketplace challenging over the short and medium term….. Despite this uncertain global backdrop, we do see opportunities as valuations for various assets have cheapened. We see value in increasing exposure to credit spread product, as well as fixed income securities that correlate more closely to equities. We also favor making trades aimed at increasing income and “rolling down the curve” (i.e., buying a relatively short maturity with meaningful yield at a discount and trading out when it reaches maximum total return)….. We don’t believe rates will rise anytime soon, but credit spreads could compress, thereby increasing total return. …”

-On Municipals: “Many are asking whether the US sovereign debt downgrade is likely to cause widespread defaults across the municipal bond market. We would answer this query with an emphatic “no.” While the downgrade has created heightened headline noise, it has not changed our view about overall defaults in the municipal marketplace. Less than 10% of the municipal bond market will be directly impacted by S&P’s downgrade of US sovereign debt. Those areas of the market that are most vulnerable are those with a direct link to US debt, including pre-refunded bonds (which are backed by Treasuries), munis backed by government agencies and certain public housing issues. These issues collectively make up a very small percentage, roughly 9%, of the nearly $3 trillion municipal bond market. It is also worth noting that only issues rated by S&P will be affected, further trimming that 9%. Outside of that small fraction of the marketplace with a direct link to US government debt, the broader municipal market will be impacted in a more remote sense by cuts based upon the federal government’s evolving deficit reduction plan….”

Makes sense, as in kinda, sorta maybe? We’ll see.