On Friday evening Standard & Poors slashed the United States' 70-year old triple-A rating to AA+, signaling a belief that the safety of U.S. Treasury debt is on the decline. The news capped a wild week on Wall Street in which the Dow Jones Industrial Average dropped 5.75%, the S&P 500 fell 7%, and the Nasdaq dipped 8%.
So what, exactly, is ailing the U.S. economy? Last weekend lawmakers finally reached a compromise to raise the U.S. debt ceiling, and although nobody seemed particularly pleased with the specifics, the deal put an end to weeks of bitter wrangling. Many believed the news would soothe markets, but it seems to have had the opposite effect. According to S&P, congress didn't cut enough to alleviate concerns over the national debt.
"Many experts hoped there would be $4 trillion in future spending cuts," says Matt Slaughter, a professor at Dartmouth's Tuck School of Business. "We got about half that ... and my sense was that aggregate fiscal cuts were all backloaded."
A more immediate concern: the country's precarious job situation. Though Friday's U.S. jobs report was better than expected and unemployment fell to 9.1%, the pace of job growth -- 117,000 added in July -- is still nowhere near the 150,000 jobs the country needs to add per month just to keep up with its own population growth, according to Slaughter.
"It's going to take several years to heal the labor market," he says. "And it's going to take more than that if we don’t have a good policy for creating jobs. We don’t have a lot of policy conversations focusing on that. Absent that, if we try to build back on the economy with more Cash for Clunkers programs, we’ll be putting ourselves on the same path that led to the last crisis."
The picture isn't much rosier across the pond, where Europe's stubborn debt problem has roiled markets. Fears of the Greek crisis spreading to larger, more crucial markets like Italy and Spain were addressed Friday, when Italy announced plans to speed up austerity measures in order to achieve a balanced budget by 2013. But that may not be enough to calm investors heading into what promises to be an eventful week of trading.
"Actions speak louder than words," says Denise Shull, founder of performance consulting outfit The Rethink Group and author of the upcoming book Market Mind Games. "Austerity measures aren't easy to put in place. It's one thing to talk about it, but it's another thing to actually do it."
Shull isn't particularly optimistic about the near-term prospects of the economy, both in the E.U. and the U.S. To defend against further turmoil in world markets, she recommends that individual investors consider hedging their portfolios by buying exchange-traded funds that short the major indices, like the ProShares Short S&P 500 (NYSE:SH) or the ProShares Short Dow 30 (NYSE:DOG).
"We're not going back up anytime soon," she predicts. "Everyone wants to avoid the fear and anxiety of that, but things can always get cheaper."