Dow Drops, but Recovers After U.S. Upgrade
After closing last week on a high note, the Dow Jones Industrial Average started this morning off even higher. But some positive news about the nation's economic stability sent investors scurrying and the index falling. Just before 11:15 a.m. EDT, the Dow has recovered from its initial shock and is climbing once again at a modest pace, with a 28-point gain.
Upgrade sends shock wave
Less than two years after the nation was stripped of its top credit rating, Standard & Poor's is once again optimistic about the U.S. economy. Upgrading the outlook for the country's current AA+ rating to "stable" from "negative," the credit rater sees fewer risks for the economy in the coming days. With slow but steady progress made in the economic recovery and spending issues somewhat addressed by the government, S&P said the likelihood of another downgrade in the near future has less than a "1-in-3" chance.
As the Street maintains its vigilance for signs that the Fed might begin tapering its current stimulus program, the news of the country's outlook upgrade sent the market down quickly less than an hour into trading. But it appears that investors have composed themselves and taken another look at the situation, as the drop did not last.
Though the prospect of a Fed cutback is scary for most on Wall Street, there are plenty of upsides for businesses looking at the long-term picture.
Dow component stock Travelers just announced that it would be purchasing Dominion of Canada General Insurance Company from E-L Financial in Canada for $1.1 billion. The insurer is looking for opportunities to expand its current Canadian operations, and Dominion's commercial and personal insurance operations will do just that.
Insurers have been pressed to find new ways to increase revenue due to the pressures of the current low-interest-rate environment. As premiums enter an insurer, they are added to a large fund that is invested by the insurer to produce higher revenue and ensure that there is enough capital to cover claims. With the current rates being so low, the insurers have been struggling to produce the investing returns needed to meet company goals, leading to lower revenue and investor concern.
As Travelers looks to expand, some of its competitors have had to find other means to offset the negative impacts of low rates. Allstate began an aggressive shift in its investing focus to adapt to the lower rates, but is sacrificing higher investing income in future periods. American International Group didn't make any such changes to its investing strategy, but has been focusing on cutting costs to offset lower investment income.
As you contemplate the changes ahead for the market once the Fed starts cutting back its bond repurchases, remember that though the transition period will be volatile, positive impacts will flow through the market as rates normalize. Be prepared, as the markets may look something like the Dow did this morning -- a big drop and then a steady climb back up. But for a long-term investor, the change is necessary, and should be welcomed.
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The article Dow Drops, but Recovers After U.S. Upgrade originally appeared on Fool.com.Fool contributor Jessica Alling has no position in any stocks mentioned -- you can contact her here. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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