Market Update: U.S. Downgraded from AAA to AA+

  • Tuesday, the ratings agency Fitch decided to downgrade the U.S. from AAA to AA+, citing a “deterioration in the standards of governance”, concerns regarding social security and Medicare sustainability, and mounting interest expense.
  • You may remember Standard & Poor’s first downgraded the credit rating of the U.S. federal government in August 2011. The S&P 500 index initially fell but closed +5.1% three months later and +18.8% a year later. We are in a different market environment for sure, but economic growth and corporate profits are still what drive market performance over the long-term.
  • Two months after the debt ceiling debate has been resolved, and with 2Q growth surprising to the upside, Fitch’s decision does not tell the markets much they do not already know.
  • Our national debt rose sharply during the Covid crisis as the federal government lined consumers’ pockets with stimulus checks. In addition, high interest rate costs – a result of the rapid rate hikes by the Fed in its fight against inflation – is driving a growing gap between fiscal revenues and outlays through the forecast horizon. Absent significant shifts in policy, the fiscal deficit will reach as high as 9% of GDP in 2028 as per Bloomberg Economics data.
  • While concerns on the dollar’s future role may prompt some countries to diversify their reserve assets away from the dollar over time, no alternatives exist that can match the liquidity and depth of the dollar market. Please see our previous article at on this topic:
  • Unfortunately, decisions to address our country’s balance sheet and fiscal challenges will be debated for years, and most likely decades, to come. We would argue that there are no good solutions, at least not any that will get anyone elected.

The Investment Team has been discussing these topics for over a year, which has shaped our current asset allocation. While some volatility in the near-term may be expected, we are focused on current and potential quality managers that can navigate and take advantage of market opportunities going forward.