Wall Street Starts Fretting about US Debt again

Wall Street starts fretting about US debt again after months of easy stock-market gains

Joseph Wilkins and George Glover 
Aug 2, 2023, 10:44 AM EDT

• Stocks have racked up easy gains over the past few months thanks to AI and cooling inflation. 
• But investors are suddenly worried about debt again after Fitch slashed its credit rating for the US. 
• The last time this happened was 2011 – and the S&P 500 took six months to recover its losses.

It’s been a brilliant year for the stock market – so far.

The benchmark S&P 500 index is currently on a five-month winning streak, up 19% in 2023 thanks to a looming Federal Reserve pause and a massive surge in interest in artificial intelligence.

That’s coincided with plenty of positive economic data – with second-quarter growth beating analysts’ expectations, inflation rapidly cooling, and unemployment holding steady at under 4%. 

But Fitch’s shocking move to slash the US government’s credit score late Tuesday means investors have to deal with something slightly unfamiliar: bad news. 

Stocks slumped in early-morning trading after the ratings agency announced its decision, before paring back some of their losses ahead of the opening bell.

Fitch’s downgrade “will naturally trouble investors and make them rethink their portfolio,” AJ Bell’s head of investment analysis Laith Khalaf said. “It also might surprise some people given how the US economy is proving to be more resilient than expected.”

The last time this happened was 2011: Standard & Poor’s downgraded the US for the first time in history. In response, the S&P 500 dropped 6.5% and took a further six months to recover its losses. 

Nothing so drastic occurred in the immediate aftermath of yesterday’s announcement – but the White House warned earlier this year that stocks would plummet 45% if the US failed to pay its debts. 

Fitch’s move comes after the government hit its $31.4 trillion borrowing limit in January – and ended up brokering an 11th-hour deal to raise the debt ceiling. It expects to have to borrow another $1 trillion in the third quarter alone.

Congress’s handling of the situation attracted criticism from financial gurus across the board, with hedge fund manager Ray Dalio remarking in January that the process was like “a bunch of alcoholics who write laws to enforce drinking limits”.

Fitch itself cited the deadlock in Washington – along with a “steady deterioration in standards of governance over the last 20 years” – as the reason for its downgrade.

For now, the risk of the US actually defaulting remains low, with the debt ceiling limit suspended and the country still holding a strong AA+ rating, on par with its neighbor Canada.

But Fitch’s downgrade is still a reminder that investors aren’t likely to have it all their own way the rest of the year, after a perfect start to 2023.

Source: Markets Insider

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