On Wednesday, the financial district of New York City experienced a significant decline in stock market values, marking the largest single-day decrease in several months. This decline was triggered by the release of information indicating that Fitch Ratings, a prominent credit rating agency, had downgraded the credit rating of the United States government by one level.
The S&P 500 fell 1.4% to its lowest level since April. This was the index’s second straight loss after hitting its highest level in 16 months just last week. The Dow Jones Industrial Average fell by 1%, and the Nasdaq composite sunk by 2.2%.
U.S. Government Loses Top-Tier Credit Rating Due to Rising Debt and Deteriorating Government Standards
Earlier on Tuesday, the credit rating of the U.S. was cut one notch from the highest possible rating of AAA to AA+. Fitch Rating cited rising debt at federal, state, and local levels and a “steady deterioration” in governance standards over the last two decades as the reason for its action. However, the new AA+ rating is still considered investor grade.
This was the first time since 2011 and the second time in the nation’s history that its credit rating was slashed. The previous time, rating agency Standard & Poor’s stripped the U.S. of its top-tier grade after both sides of Congress could not reach an agreement over the government’s borrowing limit. At the time, It was reported that the budget standoff raised borrowing costs by $1.3 billion that year.
A similar scenario unfolded in May after Congress once again argued about raising the U.S. government’s borrowing limit. On May 24, Fitch warned that it will be forced to remove America’s AAA rating due to “repeated debt limit standoffs and last-minute resolutions”.
After a lot of disagreements, the Republican and Democrat caucus reached the moral ground a week later and decided to suspend the current limit and cut about $1.5 trillion from the government’s deficit over the next ten years.
Fitch said worsening political divisions around government spending and tax policy and a decline in the governance standard of the country compared to other highly rated states as main reasons behind its decision.
United States Faces ‘Mild Recession’ Which Can Have Ramifications Worldwide
The downgrade could cost the global financial system dearly because investors often store U.S. Treasury securities during periods of economic uncertainty. Usually, this helps lower the interest paid by the U.S. government to its debt obligations.
Another major factor pointed out by the credit rating agency is that it expects the U.S. economy to fall into a “mild recession” from the final quarter of this year until the early months of 2024.
Markets analysts and investors are now closely monitoring the U.S. government’s actions to understand whether the country’s economy can avoid any chance of recession, which was widely expected following the Federal Reserve’s repeated interest rate hikes to bring inflation numbers down to the target 2%.
The Biden administration is set to produce its latest jobs report on Friday. Meanwhile, Fed chairman Jerome Powell has said the latest job numbers will influence the central bank’s decision on whether to raise or lower interest rates in September’s FOMC meeting.
Markets Drop to Their Lowest Rate in Months
Tech stocks from Microsoft, Amazon, and Nvidia continued their slump and fell more than 2.5%, dragging the S&P 500 even lower.
The biggest drop in the market came from Generac Holdings, a company that sells generators and power supply products, which fell by 2.2% after reporting weaker profits during spring than what was forecasted. SolarEdge Technologies dropped 18.4% following reports of weak revenue growth and profits. The company argued that interest rate hikes are preventing everyday Americans from spending in the market.
Only a quarter of the stocks in the S&P 500 rose. Most notably, CVS Health and Humana which climbed 3.3% and 5.6%, respectively. While CVS Health reported a mild drop in its earnings than expected, Humana surged past the forecast for the latest quarter.
When the markets closed on Wednesday, the S&P 500 fell 63.34 points to 4,513.39, the Dow dropped 348.16 points to hit 35,282.52, and Nasdaq tumbled to 13,973.45, losing 310.47 points in the process.
In the meantime, the 10-year yield on U.S. Treasury in the bond market rose from 4.04% to 4.07%. But the 2-year U.S. Treasury yield slipped as its price rose from 4.91% to 4.89%.