Fitch’s recent downgrade of the U.S. credit rating has caused a shockwave in the stock market. Although this type of event has occurred before, it was over a decade ago and during a different market era. However, investors should remain prepared for potential repercussions.
Late on Tuesday, Fitch lowered the U.S. credit rating from AAA to AA+ due to anticipated fiscal deterioration in the coming years, exacerbated by the recent debt ceiling conflict. This decision had an immediate impact on the markets, especially during a period of cautiousness leading up to the release of the U.S. jobs report on Friday and amidst ongoing turmoil surrounding corporate earnings, including the highly anticipated results from Apple (AAPL). Consequently, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite are all expected to experience declines in the near future.
This is not the first time a credit rating firm has made such a move. Three major players in this space are S&P, Moody’s, and Fitch. S&P previously downgraded the U.S. credit rating on August 5, 2011, following another significant debt ceiling battle.
Although Fitch’s recent decision is significant, it may not carry the same weight as S&P’s downgrade over a decade ago. On August 8, 2011—following S&P’s downgrade—stock markets experienced a near-7% decline, commonly referred to as “Black Monday.” The benchmark index continued to drop by 5.7% that month and an additional 7.2% in September. In contrast, futures contracts tracking the S&P 500 have only dipped by 0.6% thus far on Wednesday.
While it is still early to gauge the full impact of Fitch’s decision, investors are advised to closely monitor market developments and exercise caution during these uncertain times.
Reasons to Believe S&P 500 Declines Won’t Be as Severe
The S&P 500 has experienced its fair share of ups and downs in recent years, from the tumultuous impacts of the Covid-19 pandemic and stimulus-driven market rallies to the turbulence caused by inflation concerns and interest rate hikes. However, if we look back at 2011, it becomes clear that the current situation might not be as dire.
During 2011, the aftermath of the 2008-09 financial crisis left Wall Street on unsteady ground, and unemployment rates remained high. The year was marked by a contentious debt ceiling battle and significant developments in Europe’s debt crisis.
Today, though, the circumstances are different, and there are valid reasons to question the timing of Fitch’s downgrade. The White House has dismissed the move as being based on outdated data. When we consider the current state of the U.S. economy, it becomes evident that things are still on a positive trajectory. Unemployment rates are low, economic growth remains strong despite historically high interest rates, and inflation is gradually receding from its multi-decade highs.
Sophie Lund-Yates, an analyst at broker Hargreaves Lansdown, acknowledges that Fitch’s move is somewhat based on outdated information, especially when considering the improved inflation trajectory. However, despite this fact, the stock market has still reacted to the news.
While it is important for investors to brace themselves for short-term volatility, it’s crucial to remember that this year has been highly favorable for stocks. Since January, the S&P 500 has surged more than 19%. Moreover, there are multiple reasons for optimism, even amongst Wall Street’s most pessimistic figures. For instance, Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, has recently shifted his stance to a more positive outlook.
Considering that Fitch is the least influential of the three major credit rating firms, its downgrade is unlikely to significantly diminish investor confidence.