Although Standard & Poor's downgrade of the United States' top tier credit rating sparked a swift and massive selloff in the global equity markets, it won't affect how institutional investors and hedge funds build their portfolios, according to Dan Greenhaus, the chief global strategist at international broker dealer BTIG.
In an interview with Advanced Trading, Greenhaus spells out what the buy-side can do to weather the latest market crisis, why S&P's call was controversial but correct, and how today's climate resembles 2008.
What are we to take from yesterday's massive selloff? What were investors preparing for?
Greenhaus: What Monday's sell-off shows is the level of uncertainty and nervousness that's obviously on display in the economy. There is concern about growth here in the United States; there is concern about the level of debt that we have. There is concern about a slowdown in emerging market economies. There is a concern about the European banking sector. And in light of that is a shift from a moderately optimistic position to a "holy cow, we're going into a recession" position that occurred quite quickly. As a result you saw a substantial decline in equity prices over a short period of time.
Now in terms of what to expect, I think history suggests this type of decline is not normal and occurs quite infrequently and usually rewards investors over a short time frame of a couple months let's say. But the uniqueness of the current situation, the fluid nature of the headlines suggests this could just be the beginning, or it could be the end.
Unfortunately the reality is that politicians are in control now and that makes investing and forecasting incredibly difficult.
For institutional investors and hedge funds, what does the S&P downgrade mean for their portfolio construction process over the near term?
Greenhaus: I would argue that the S&P downgrade means relatively little. Treasuries are still the safe haven asset whether they're AA+ or AAA. And quite frankly most pension funds and money market funds don't have requirements for AAA rated securities and certainly not requirements that they must be rated AAA by all three rating agencies.
Following Monday's close, the S&P 500 had declined 14 percent over its last 11 sessions. What does this indicate? Is this 2008 all over again?
Greenhaus: This is situation is coincident with what we've seen in the crisis. The speed and force of the decline rivals what we saw in October and November of 2008. That's not saying very much in a positive sense. But again, it speaks to the speed with which investors have begun to reassess the economic situation. Now going forward it suggests that over a certain period of time - depending on how you want to do it - investors tend to be rewarded. Huge, steep declines tend to be bought and three months later or six months later you tend to do okay.
What's the best thing the buy-side can do to weather this latest crisis?
Greenhaus: It really depends on where you stand in terms of your expectations for the next 12 to 18 months. If you think the U.S. is entering a recession - and I would argue a lot of people do based on the level of cash raising that we've seen - then obviously the best thing you can do is to take down your exposure. But if you don't think we're going into a recession and you think the economy continues to muddle through just as it has, there's nothing to suggest that the equity market can't do okay in that type of an environment.
What do you make of S&P's decision to downgrade the U.S. credit rating? Wise or foolish move?
I think S&P is catching some flack for the fact that they took the political process into consideration. And perhaps deservedly so, but at the end of the day, one has to ask themselves if given our intermediate to longer term fiscal position is as bad as it is - and I would argue it's even worse - you have to wonder why we would be as credit worthy today as we were the day before. I don't know that we're a BBB, but you could make the case that without a credible plan to adjust the medium to longer-term deficit, we're not a AAA, we're a AA.
As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio