Making Sense of the Moody’s Downgrade
Here’s our view on what the U.S. Debt downgrade means for Investors.
On Friday, Moody’s (a credit rating and risk analysis company) downgraded the U.S. credit rating, citing growing fiscal deficits, political gridlock, and long-term debt sustainability concerns. This follows a Fitch downgrade in 2023, and S&P in 2011, marking the last of the big three credit ratings firms to downgrade from AAA to AA. Other than the 2011 downgrade, this was not unexpected. However, the most recent move has prompted even more questions about the health of U.S. government debt and the broader market implications.
Here’s what investors should know:
- The downgrade does not signal default. U.S. Treasuries remain the world’s benchmark for safety and liquidity. Oarsman Capital will continue to look to the treasury market for reliable interest income and liquidity.
- Market volatility will likely rise, particularly around debt ceiling debates or fiscal policy uncertainty. With this added stress and uncertainty, stocks will likely see some near-term selling pressure as investors wrestle with how fiscal policy might be adjusted going forward.
- The downgrade should eventually lead to higher interest rates and higher interest costs for the US, adding further pressure to fiscal policy. While this negatively impacts stocks and current bond holdings, fixed income investors will benefit from higher rates.
Ultimately, this downgrade is a message the markets have already known for years. The US debt level is a major problem, and fiscal responsibility is needed. A likely solution is a combination of increased revenue (higher taxes) and lower expenses (spending cuts).
We approach these developments with perspective and discipline. Our portfolios are built to withstand uncertainty through diversified, risk-aware strategies tailored to long-term goals.
If you have questions about what this means for your investments, we’re here to help.
The Oarsman Team