Global stock markets experienced a significant decline after credit rating agency Fitch downgraded the United States’ long-term credit rating. Fitch downgraded the U.S. long-term foreign currency issuer default rating from AAA to AA+, citing expected fiscal deterioration, repeated debt-limit political standoffs, and a growing debt burden.
Following the downgrade, U.S. stock futures showed a sharp decline, indicating a potential fall of nearly 300 points for the Dow Jones Industrial Average at the opening of the market on Wall Street. The pan-European Stoxx 600 index also dropped 1.6%, with all sectors and major bourses trading in the red. Asian-Pacific stocks also experienced a significant plunge.
Prominent economists, including former U.S. Treasury Secretary Larry Summers and Allianz Chief Economic Advisor Mohamed El-Erian, were highly critical of Fitch’s decision. Summers called it “bizarre and inept,” while El-Erian expressed his perplexity regarding the timing and reasoning behind the downgrade. Current Treasury Secretary Janet Yellen dismissed the downgrade as “outdated.”
Limited Impact on Financial Markets
Goldman Sachs Chief Political Economist Alec Phillips noted that the downgrade is not expected to have a lasting impact on market sentiment beyond immediate shock selling. Phillips argued that the decision did not rely on new fiscal information and highlighted the similarities between Fitch’s projections and their own. He stated that the downgrade does not reflect new information or a significant difference of opinion about the fiscal outlook.
Fitch’s downgrade is the first of its kind since 1994. However, in 2011, another ratings agency, S&P, downgraded the U.S. sovereign rating. Although it had a negative impact on market sentiment, there was no apparent forced selling at that time, and the S&P 500 index recovered 15% over the following year.
One important aspect to note is that Fitch did not adjust its “country ceiling,” which remained at AAA. If Fitch had lowered the country ceiling, it could have had negative implications for other AAA-rated securities issued by U.S. entities. Wells Fargo Securities Head of Equity Strategy, Chris Harvey, also emphasized that the Fitch downgrade should not have a similar impact to the 2011 S&P downgrade. Wells Fargo believes any stock pullback would be relatively short and shallow.
While many experts believe that the immediate impact of the downgrade will be limited, veteran investor Mark Mobius suggested that investors may rethink their strategies on U.S. debt and currency markets in the longer term. He mentioned the possibility of diversifying holdings away from the U.S. and into equities to protect against currency deterioration. Virginie Maisonneuve, global CIO of equity at Allianz Global Investors, also highlighted the need for attention but urged investors to consider other potential triggers for a more prolonged downturn.
The downgrade of the U.S. credit rating by Fitch has caused global stock markets to plummet. Despite criticism from prominent economists, market analysts suggest that the impact may be short-lived. While investors may reassess their strategies, the prevailing sentiment is that other factors should be considered when anticipating future market trends.
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