Global stock markets were rocked by turbulence when Fitch, a prominent ratings agency, downgraded the long-term credit rating of the United States. Fitch’s decision lowered the U.S. long-term foreign currency issuer default rating from AAA to AA+, citing concerns over anticipated fiscal deterioration in the next three years, governance issues due to repeated debt-limit political standoffs, and an increasing debt burden.
The downgrade’s immediate impact was evident, with U.S. stock futures sharply lower, hinting at a potential 300-point drop for the Dow Jones Industrial Average at the opening bell. Meanwhile, the pan-European Stoxx 600 index fell by 1.6%, and Asian markets experienced a widespread plunge. The Dow closed 348 points, or 1%, lower, while the S&P 500 fell 1.4%, and the Nasdaq dropped 2.2%, marking its worst performance since February. Tech giants like Amazon, Meta, Microsoft, Tesla, Nvidia, and Apple led the declines due to their sensitivity to interest rate changes.
Despite the market turmoil, leading economists are urging for calm. Larry Summers, former U.S. Treasury Secretary, and Mohamed El-Erian, Allianz Chief Economic Advisor, criticized Fitch’s move, with Summers calling it “bizarre and inept.” Janet Yellen, the current Treasury Secretary, dismissed the downgrade as outdated.
Goldman Sachs’ Chief Political Economist, Alec Phillips, reassured investors that the impact on market sentiment would likely be short-lived. He highlighted that Fitch’s projections align with their own, and the downgrade doesn’t reveal any new information or a significant difference in opinion about the fiscal outlook.
Notably, this isn’t the first time the U.S. faced a credit downgrade; S&P downgraded the U.S. sovereign rating in 2011, which had a substantial impact on market sentiment. However, experts argue that the current conditions are different, and any pullback in stocks should be limited.
Despite the market uncertainty, the earnings season remains relatively strong, with around 82% of S&P 500 companies surpassing expectations, according to FactSet data. Companies like CVS and Kraft Heinz saw positive gains after their earnings reports, bucking the broader market trend.
Mortgage rates also rose following Fitch’s downgrade of U.S. debt, leading to increased borrowing costs. Lawrence Yun, chief economist at the National Association of Realtors, expressed skepticism about the downgrade’s seriousness, citing the U.S. government’s strong history of repaying debt.
While the market experienced significant declines, some investors believe stocks were due for a pullback after a prolonged period of growth this year. Analysts are also awaiting earnings reports from major companies like Apple, Amazon, and Airbnb, along with the July labor report, which could further impact market sentiment.
As the U.S. markets navigate the aftermath of the credit downgrade, economists and investors maintain cautious optimism, emphasizing the resilience of the U.S. economy.
By: Montel Kamau
Serrari Financial Analyst
3rd August, 2023
photo credit Google
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