{"id":12644,"date":"2023-08-21T18:49:02","date_gmt":"2023-08-21T18:49:02","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12644"},"modified":"2024-01-10T17:13:55","modified_gmt":"2024-01-10T17:13:55","slug":"what-will-be-the-impact-of-the-u-s-credit-downgrade-2","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/what-will-be-the-impact-of-the-u-s-credit-downgrade-2\/","title":{"rendered":"What Will Be The Impact Of The U.S. Credit Downgrade?"},"content":{"rendered":"\n

What to Make of Credit Downgrades for the U.S. and Its Banks<\/strong><\/p>\n\n\n\n

In early May, the company Fitch Ratings put out a press release warning of a potential downgrade to the U.S.\u2019s sterling AAA credit rating. Fitch was responding to the debt ceiling drama as it unfolded, attaching its name to the largely misguided narrative that the U.S. was charging towards a debt default.1<\/sup><\/p>\n\n\n\n

Now, nearly two months after a debt ceiling deal was struck \u2013 and with worries about debt default gone \u2013 Fitch made its splash in the news cycle by lowering its rating on the U.S. to AA+, one notch down from the top AAA grade.<\/p>\n\n\n\n

If investors were expecting the downgrade to be accompanied by new revelations about the U.S.\u2019s fiscal standing, they were greatly disappointed. Instead, Fitch Ratings cited the debt ceiling drama, Congressional Budget Office debt and deficit forecasts, Social Security and Medicare funding, the 2017 tax cuts, and high government spending as the causes for concern.<\/p>\n\n\n\n

Is Now a Good Time to Invest in the Market?<\/span><\/a><\/strong><\/p>\n\n\n\n

Before attempting to answer this question, be sure to check Zacks’ newly released August Stock Market Outlook Report.<\/a><\/strong> Today, Mitch on the Markets\u2019 readers are invited to read it for FREE.<\/p>\n\n\n\n

This report contains some of our key forecasts to consider such as:<\/p>\n\n\n\n

\u00b7 Top-down S&P500 yearend 2023 and 2024 targets
\u00b7 Zack\u2019s view on equity markets
\u00b7 Setting U.S. returns expectations for 2023
\u00b7 Zacks Rank S&P500 sector picks
\u00b7 Zacks rank industry tables
\u00b7 And more\u2026<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<\/p>\n\n\n\n

Download Our Just-Released August 2023 Stock Market Outlook Report2<\/sup><\/span><\/a><\/strong><\/p>\n\n\n\n

In other words, it was a collection of information that markets and investors have long, long known and understood.<\/p>\n\n\n\n

To be clear, I do not intend to minimize problems the U.S. faces with mounting debt and interest payments. As seen in the chart below, total debt as a percent of GDP (blue line, left axis) has soared since the 2008 Global Financial Crisis, and remains above 100%. That\u2019s too high.<\/p>\n\n\n\n

Additionally, interest payments as a percent of GDP (red line, right axis) are still benefiting from a prolonged period of low interest rates, but yields are rising \u2013 which means borrowing is becoming more costly. This dynamic of high absolute debt and rising interest rates can restrict the U.S.\u2019s ability to borrow more in the future, which can crimp spending and investing \u2013 and therefore impact GDP growth.<\/p>\n\n\n\n

Debt as % of U.S. GDP (left axis) and Interest Payments as % of GDP (right axis)<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/strong><\/em><\/figcaption><\/figure>\n\n\n\n

While I think debt and interest cost issues are worth monitoring, I do not think the opinions of ratings agencies should factor much into an investor\u2019s decision-making process. In my view, they lack credibility. You do not need to look very far back in history to understand why. In the spring of 2008, Fitch gave Lehman Brothers\u2019 preferred stock an A+ rating, about a month after Bear Stearns failed. Five months after receiving Fitch\u2019s A+ rating, Lehman Brothers collapsed.<\/p>\n\n\n\n

A few years later, 2011\u2019s \u2018fiscal cliff\u2019 drama gripped the headlines for months, and Standard & Poor\u2019s \u2013 another ratings agency \u2013 made waves when they downgraded the U.S.\u2019s debt rating from AAA to AA+. At the time, this felt like a huge deal that could impact the U.S.\u2019s ability to borrow (issue Treasurys) at attractive rates. Logic would say that a debt downgrade should put upward pressure on the cost of borrowing, which would imply rising yields on U.S. Treasurys.<\/p>\n\n\n\n

But the opposite happened \u2013 yields fell after the downgrade.<\/p>\n\n\n\n

Yield on 10-Year U.S. Treasury Bond (2011)<\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

As a follow-on to Fitch\u2019s downgrade of the U.S., Moody\u2019s came out this week and cut the credit ratings on 10 regional banks, while placing six noteworthy financial institutions into \u2018review.\u2019 At first glance, many investors might have seen this news and thought that early spring\u2019s bank stress was back. But it turns out that Moody\u2019s downgrades were just a rehashing of the same issues that came to light months ago.<\/p>\n\n\n\n

In their report, Moody\u2019s said that rising interest rates \u201ccontinue to have a material impact on the U.S. banking system\u2019s funding and its economic capital,\u201d adding that higher rates are impacting the value of bonds and other assets on bank balance sheets, leaving lenders with \u201csizable unrealized losses.\u201d Moody\u2019s also cited risks that a recession could have on loan demand and called out issues in the commercial real estate markets like plummeting demand for office space.<\/p>\n\n\n\n

The market has known about these problems for months.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

Back in May, Fitch rightly characterized the U.S. missing a debt payment as a \u201cvery low probability event.\u201d It seemed like an acknowledgment that the U.S.\u2019s issues around debt and obligation payments were more of a political problem than an economic one, which I think is an accurate framing of the issue.<\/p>\n\n\n\n

But Fitch issued its downgrade anyway, citing other pieces of dated and widely-known information about taxes, entitlement programs, and CBO budget projections. It\u2019s a delayed reaction based on old news, which I think renders its impact on markets and the economy as insignificant.<\/p>\n\n\n\n

An alternate telling of the U.S.\u2019s credit and fiscal standing is not that far away, either. Both Standard & Poor\u2019s and Moody\u2019s continue to give the U.S. the highest possible rating.<\/p>\n\n\n\n

To get more insight into current market trends, I\u2019m offering our exclusive, Just-Released August 2023 Stock Market Outlook Report<\/a>.<\/strong> This report will give investors a deeper insight into:<\/p>\n\n\n\n

\u00b7 Top-down S&P500 yearend 2023 and 2024 targets
\u00b7 Zack\u2019s view on equity markets
\u00b7 Setting U.S. returns expectations for 2023
\u00b7 Zacks Rank S&P500 sector picks
\u00b7 Zacks rank industry tables
\u00b7 And more\u2026<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<\/p>\n\n\n\n

Download Our Just-Released August 2023 Stock Market Outlook Report5<\/sup><\/span><\/a><\/strong><\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Mitch digs in to Fitch’s recent downgrade of U.S. credit, which it based on the recent debt ceiling drama, CBO debt and deficit forecasts, entitlements, and other areas of concern. <\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-12644","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12644","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12644"}],"version-history":[{"count":6,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12644\/revisions"}],"predecessor-version":[{"id":12935,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12644\/revisions\/12935"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12644"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12644"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12644"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}