The stock market immediately started losing steam but held onto about half of that gain. Asia was negative overnight on that news. Europe is mixed this morning, and the Dow looks like it may gain about 20 points at the open. The powerful momentum of the past week was clearly broken.
There is a strong sense of deja vu. It was S&P who downgraded the U.S. because of our inability to deal with the deficit politically. That had minimal impact on our borrowing costs because the Fed will buy everything the Treasury wants to sell. However, the ECB has not promised to do the same for Europe, making a credit downgrade potentially more damaging to Europe.
My first thought was that this action by S&P greatly increased the pressure on European leaders for Friday’s summit, increasing the probability of finally putting this crisis behind us. My second thought was that S&P did the same thing to the U.S. prior to the disgusting debt negotiations in Congress in August, and it made absolutely no difference. The elected children in Congress, who prefer purity to productivity, did nothing, and S&P promptly downgraded our credit.
The hardest part in making economic predictions is knowing which of the myriad economic variables are controlling the outcome. I feel comfortable making those predictions. The hardest part in making political predictions is knowing whose bundle of emotions will control the emotions of others. I feel clueless making those predictions.
Tell me what happens Friday at the European summit on the financial crisis, and I’ll tell you how the stock market will close that day.