Late into the last minute of the 11th hour, it looks like an awkward deal will be struck to raise the debt ceiling and avoid default. Despite the ugly and recalcitrant nature of this self-imposed emergency, Washington was able to negotiate their way out of the crisis, but just barely. I was always in the camp that no matter what the result, in the end the U.S. would not default on its debt obligations for the first time in history.

Regardless of the outcome, an unfortunate and unnecessary amount of damage has been done to the economic stature of the United States. Months ago, the bond rating agencies had threatened to downgrade U.S. debt from its AAA status, and now they have every reason to follow through. When this happens the stock market will likely take a hit, but as a long-term investor I feel a correction would be healthy in what has been a record bull market.

Click for larger image

As can be seen in the chart above, even though the S&P 500 has been taking a beating lately it is down only 5.6% from the highs it reached at the end of April. It is still up 93% from its lows of early 2009, so I believe a correction of 10-20% would be a healthy adjustment at this time. Earnings have been strong, and the yield curve remains as steep as ever. Until more of the fundamentals change I believe this will be a continued up market for several years to come.

Regardless, hang on for what should be a wild second half of 2011!

Comments are closed.