Fitch downgrade of US debt is more of an indictment of the dysfunction in Washington than a real worry about the credit worthiness of the US.
On Tuesday, Fitch became the latest credit ratings agency to downgrade US debt below the pristine AAA level. In doing so, it leaves only Moody’s as the last firm holding US debt in such high regard. This leaves Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore, and Australia as the countries rated AAA by all three rating agencies (Canada is rated AAA by two).
While the stocks and bonds traded lower on the day, the reaction was relatively muted compared to S&P’s downgrade in 2011 when stocks were down between 5 – 7%. The market’s reaction is all you need to see to realize this move is more symbolic than anything else. Fitch cited reasons like “fiscal deterioration” and a “growing general level of government debt burden” as the basis for their decision. But the two points that really stuck out were the “erosion of governance” relative to the other AAA rated countries and “repeated debt limit standoffs”. They essentially pointed the finger right at Congress and said get your act together or you’re going to have a problem.
We all know that in Washington, if it’s not today’s problem, then why worry. The market seems to only be reinforcing that behavior. Let the blame game begin. After all, the 2024 election is only 459 days away. As always, our job is to separate the news from the noise as it pertains to the markets. For now, we’ll put this one in the noise category and stay focused on what really matters to building our client’s wealth.