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Two days before the United States faced the possibility of running out of enough cash to pay all its bills, President Joe Biden on Saturday signed legislation that temporarily lifted the nation’s debt ceiling, averting a potentially catastrophic first-ever default by the U.S.
However, some investors still remained worried about a potential second U.S. credit ratings downgrade by one of the big-three major credit firms, which could derail the stock market’s latest rally.
Fitch Ratings on Friday said in a statement that the U.S. remained on rating watch negative “as we consider the full implications of the most recent brinkmanship episode and the outlook for medium-term fiscal and debt trajectories.”
For some, it brings back memories when the S&P Global Ratings in 2011 downgraded U.S.’s rating to AA+ from AAA, days after a debt ceiling deal was reached near the last minute.
The current situation “would not be all that different from 2011,” according to Ross Mayfield, investment strategy analyst at Baird. Similar to 2011, any changes in credit ratings “would be more about process than actual fiscal situation,” Mayfield said.
Richard Francis, co-head of Americas sovereigns at Fitch, said that “we have a ‘AAA’ rating on the United States. But I’d say that governance is generally weaker than other ‘AAA’s, which would include the repeated brinkmanship surrounding the debt ceiling limit.”
“Certainly reforms around the debt ceiling that make future standoffs less risky or less likely to happen would be positive from a ratings point of view,” Francis wrote in emailed comments to MarketWatch.
On Aug. 8, 2011, the day S&P Global downgraded U.S. government debt from AAA, the S&P 500 closed down 6.5%. The dollar
DXY,
fell and credit spreads widened, while Treasuries rallied.
Still, it’s worth noting that there were several other factors at play in 2011, especially the debt crisis in the European Union, noted Mayfield.
If Fitch does downgrade the U.S. credit rating this time, it might trigger a profit-taking period for the S&P 500, mitigating its latest rally that sent the index near a level that if closed above, would confirm its exit from a bear market, according to Sam Stovall, chief investment strategist at CFRA Research.
The S&P 500
SPX,
fell 0.2% on Monday, the Dow Jones Industrial Average
DJIA,
lost 0.6% and the Nasdaq Composite
COMP,
shed 0.1%.
José Torres, senior economist at Interactive Brokers, said he doesn’t think a similar downgrade from 2011 would happen this time.
Compared with 2011, the Washington negotiators acted faster to reach a deal, Torres noted.
“It was a good deal on both sides with bilateral concessions. The Republicans could have placed a lot more emphasis on slashing spending since they hold the leverage of not controlling the White House, like in 2011, but chose pragmatism and balance in order to avoid default,” noted Torres.
Read: Opinion: The debt-ceiling deal hurts your Social Security benefits. Here’s why.
Rich Steinberg, chief market strategist at the Colony Group, said he doesn’t expect it to be market moving whether or not Fitch makes any changes on its credit rating of the U.S., as the market looks passed the debt ceiling issues.
“The market is now focused on Fed policy and the direction of earnings in 2024,” said Steinberg.
