What the S&P Downgrade Means to Investors and the Economy

A downgrade to U.S. government debt was bound to have its consequences, and after downgrading the government, ratings agency Standard & Poor’s (NYSE:MHP) saw fit to downgrade the debt and mortgage finance giants Fannie Mae and Freddie Mac, which were taken over by the government in 2008. Fannie and Freddie are now sporting matching AA+ ratings.

Investing Insights: The Stage is Set for Ben Bernanke and Precious Metals.

“The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government,” reads a statement from Standard & Poor’s, outlining their decision. While it’s not yet clear what effect the downgrade will have on Fannie and Freddie’s borrowing costs, some investors worry the downgrade could cause interest rates on mortgages to rise, though Treasury yields fell Monday despite the government’s downgrade, news of which came late Friday, well after markets closed for the weekend.

Standard & Poor’s also downgraded Federal Home Loan Banks, which is a group of cooperatives used by lending institutions to finance housing and economic development in local communities. However, highly-rated businesses like Johnson & Johnson (NYSE:JNJ) are still in the clear.

But possibly the biggest casualty to the S&P downgrade was the Dow Jones Industrial Average (NYSE:DIA), which shed over 600 points Monday, while the S&P 500 (NYSE:SPY) fell 6.66%, and the Nasdaq (NASDAQ:QQQ) fell 6.90%. Meanwhile, the U.K.’s FTSE fell 3.4% to 5,069 on Monday, its lowest close since July 2010. Markets throughout Europe and Asia were all consistently down Monday as a result of the downgrade. Investors have predictably been fleeing to always-popular safe havens like gold, with prices climbing to new records on Monday.

While the Thomson Reuters/Jefferies CRB Index of 19 raw materials fell to 321.26, its lowest level since December 20, gold climbed above the $1,700-mark for the first time. Gold (NYSE:GLD) futures for December delivery climbed as high as $1,718.20 Monday morning, and Matthew Zeman, a strategist at Kingsview Financial in Chicago, says gold prices could jump as high as $2,000 in the next few weeks. Goldman Sachs (NYSE:GS) raised its forecast for gold futures to $1,645 on a three-month horizon, $1,730 in the next six months, and $1,860 in the next twelve, expecting real U.S. interest rates to stay lower for longer. Gold prices have already climbed 20% in 2011.