Last Week’s Markets in Review: U.S. Credit Downgrade Pressures Markets

Global equity markets finished lower for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,478, representing an decrease of 2.26%, while the Russell Midcap Index moved 2.07% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -1.19% over the week. As developed international equity performance and emerging markets were also lower, returning -2.38% and -2.36%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 4.03%.

For the second time in the past 15 years, the U.S. credit rating was cut by a major rating agency. Last week, Fitch cut the U.S. long-term rating from AAA to AA+, as it cited rising concerns over the increasing government deficit. This was not a blindsided downgrade by the agency either, as Fitch put the U.S. rating on negative watch in May when lawmakers in Washington once again fought over an agreement on the country’s debt ceiling.

The history of downgrades to the U.S. credit rating is marked by significant events that have influenced the country’s economic standing on the global stage. The United States, historically known for its stable economy, suffered its first credit rating downgrade in August 2011. At that time, it was credit rating agency Standard & Poor’s (S&P) that lowered the U.S. long-term debt from the coveted AAA rating to AA+, citing concerns over the country’s rising debt levels and the political gridlock surrounding the debt ceiling crisis. The downgrade sent shockwaves through financial markets, reflecting doubts about the nation’s ability to manage its fiscal responsibilities. Despite subsequent efforts to address fiscal issues, the U.S. faced another downgrade in 2013 from Fitch due to a prolonged government shutdown and debt ceiling brinkmanship, eerily like the reasons that were cited this past week.

Of the three major rating agencies (Standard & Poor’s, Moody’s, and Fitch), Fitch has been the most volatile when it comes to its adjustments to the U.S. credit standing. Consider the chart below. As we can see, Fitch, comparatively has adjusted its outlook and rating more than the other agencies, whether it be positively or negatively.

Based on the agency’s history, it may appear that Fitch’s recent downgrade could be short-lived. Despite the concerns that the agency has, there does appear to be resiliency in the U.S. economy and its ability to withstand its’ deficits, at least over the short term. The views of Fitch have also, thus far, deviated from the consensus of other major agencies as we have yet to hear of any type of downgrade or negative watch from either S&P or Moody’s at this time. Additionally, the White House immediately released press release disagreeing with the Fitch’s agencies decision to cut the rating.

These developments will be important to monitor as a significant deterioration of the world’s largest lender, which we do not believe is probable at this point could cause significant repercussions across global markets. As a reminder, Moody’s still maintains a Aaa rating for the U.S. with a stable outlook, and many still view the U.S. as “the shiny city on top of the global economic hill” …at least for now.

We hope that everyone has a productive week ahead!

Rating agency ratings history from Moody’s, S&P Global, & Fitch as of 8/2/2023. Equity Market, Fixed Income returns, and rates are from Bloomberg as of 8/4/23. Economic Calendar Data from Econoday as of 8/4/23. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.