A Few Thoughts on the US Credit Rating Downgrade

It happened again…

Fitch’s lowering of US debt rating from AAA to AA+ matches the S&P downgrade in August 2011.  Even after downgrades, 12 years apart, by two of the three largest and most important credit rating agencies, US Treasuries are still considered to be one of the safest investments in the world, if not the safest investment in the world.  In fact, the interest rate US Treasuries pay is referred to as the “risk-free rate.”   This is due to the widely held belief that the US would honor its debt commitments because Treasuries are backed by “the full faith and credit of the United States.”  Today, of the big three rating agencies, only Moody’s maintains a AAA rating on the US creditworthiness.

August 2011

As one would assume, circumstances were different during the 2011 downgrade.  However, the same general discord between the two political parties likely served as the root of the issue again today, as before.   In 2011, a divided Congress and President debated the budget, deficit spending, and debt ceiling limits.  Within days of what some believed to be a default date, the two sides came together in agreement to pay the country’s obligations.  Being that close to a default, appeared to be concerning enough for S&P to lower the debt rating of the United States.  Up until the downgrade, many viewed that to be unthinkable.

As a result, the equity markets sold off significantly on the first day of trading after the downgrade.  The months of August and September were also ugly.  However, after a significant rally in October, the S&P 500 was flat for calendar year 2011. 

Ironically, the very item that was downgraded went up in value.  US Treasuries went from yielding 2.30% at the beginning of August, to 1.98% at the beginning of September, and closing 2011 with a yield of 1.97%.

August 2023

Not surprisingly, with the Fitch downgrade, the equity markets closed off today with the S&P down 1.38%, the Dow Jones Industrial Average (DJIA) off 0.98%, and the NASDAQ off 2.17%.  Not nearly as harsh as the sell-off some 12 years before when the equity markets closed down 5.55 – 6.90% on the first day of trading after the S&P downgrade.  Today’s ten-year Treasury note went from approximately 4.05% yesterday, to today’s close of 4.10%.

Other Items of Note

• Although corporate earnings are expected to be lower for the third consecutive quarter, it currently appears that Q2 earnings are not as bad as initially expected.  This is what also happened in Q1 when actual corporate earnings ended up higher than originally anticipated. 
• Yesterday’s JOLTS (Job Openings and Labor Turnover Survey) by the US Bureau of Labor Statistics (BLS) showed June’s job openings stand at 9.6 million positions.  This equates to “0.6 unemployed persons per job opening” per the BLS.
• The unemployment rate and non-farm payroll numbers will be released Friday showing the number of new jobs created.  This data will be closely watched as another indicator in the economic outlook.
• Today, the economic team at Bank of America announced they are no longer predicting a recession.  They are now forecasting a slowdown in the economy but not an actual recession.  Seems as if the soft-landing crowd is growing larger.