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S&P downgrades U.S. Long Term Credit Rating

04/18/2011

Before the market opened on Monday April 18, Standard & Poor's (S&P) downgraded the U.S. long term credit rating from stable to negative. Being placed on negative watch puts the U.S. in a position to potentially lose its' AAA rating within the next few years. In May of 2009 the United Kingdom was placed on the same negative watch.

Let's take a glance at the social and market consequences of this morning's announcement.

Social Consequences

  • I would expect S&P to reaffirm its' negative outlook on the U.S. within the next 12 to 18 months. Last Summer it did just that with the U.K.
  • I would not be surprised if Moody's or Fitch made similar revisions
  • The U.S. long term credit rating remains AAA for S&P, Moody's and Fitch
  • The U.S. long term credit outlook is now negative for S&P; stable for Moody's and Fitch
  • There is no change in mandate for holders of AAA sovereign debt with the lower outlook, only an actual ratings downgrade would impact the bond holder mandates
  • The anticipated date the U.S. reaches the $14.29 trillion debt ceiling now moves to the lead headline for all of network television
  • Today's move is positive to expedite the debate and enacting of a meaningful deficit reducing budget by U.S. policy makers
  • Whatever deficit reducing budget is enacted it is unrealistic to believe the U.S. fiscal condition will be upgraded
  •  The probability of a U.S. personal income tax increase, Bush tax cuts expire on December 31, 2012, has now increased

Market Consequences 

  • I believe today's S&P revision was "priced in" by the U.S. Treasury market and Foreign Exchange market over the past 6 months
  • The selloff in the U.S. Equities market today was more about a market which has been "flirting" with correction status the past 6 weeks, less about the U.S. revision. Sovereign debt concerns most directly impact Fixed Income and Foreign Exchange markets.
  • The precious metals market has replaced the VIX (Volatility Index) as the ultimate measure of investor concern related to Sovereign Debt
  • Australia, Canada, Germany and the Emerging Markets remain opportunities.
  • U.S. corporate balance sheets remain the best balance sheets, consumer now have elevated ahead of government balance sheets


View Joe Terranova's 4/19/11 Interview on his review of the 5 Tailwinds for the 2011 Market.  

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