With Standard & Poor’s recent downgrading of some of the subprime loans, this question comes to mind: Will continued problems in that area, like more downgrades or defaults, have a negative effect on stocks and subsequently mutual funds and ETFs?
MarketWatch had a story on that subject, which made the case for a potential spillover into stocks. I have to agree with it, but the timing is very uncertain. Once Wall Street traders focus more attention away from the lucrative M&A; business and get done with evaluating the earnings season in the next couple of weeks, they may just look for other things to dwell on.
Subprime problems certainly might take center stage especially if the downgrading continues. I liked Peter Schiff’s (Euro Pacific Capital) quote best when he said in regards to subprime loans that “if lenders themselves call them liar loans, why should we think they’re boy scouts?”
This debacle is far from being over, and it pays to have a strategy should the stock market become the whipping boy of the subprime fall out. Depending on the severity of the outcome, it can certainly derail this enthusiastic rally in a hurry; however, those with clearly defined exit strategies may be in a position to avoid serious portfolio damage.