Fitch's US debt-rating downgrade is bad news for stocks. Here's everything you need to know.
Kevin Dietsch/Getty Images
- Fitch cut the US's credit rating Tuesday, citing rising debts and an "erosion of governance".
- The downgrade comes two months after Joe Biden and House Republicans reached an 11th-hour deal to stop a catastrophic default.
- Stocks declined after the agency's shock announcement.
August is usually the quietest month of the year for the stock market.
But Fitch shattered any sense of summer calm last night when it slashed the US government's credit score in what could end up being a massive blow to President Joe Biden's economic track record.
Here's everything you need to know about the ratings agency's shock move.
What happened?
On Tuesday, Fitch downgraded the US's long-term rating from the top-tier AAA score to AA+.
That means it believes the government is now less likely to be able to repay its debts, only two months after Biden and House Republicans reached an 11th-hour deal to avoid a catastrophic default.
Fitch said the last-minute debt-ceiling deal after months of shutdown had failed to convince it that Congress will be able to avert future calamities.
"There has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025," it said in a statement.
The agency added that it's also concerned about rising government debts and the long-term health of programs like Social Security and Medicare.
How are stocks responding?
As debt-ceiling negotiations dragged on earlier this year, the White House warned stocks could crash 45% if the government ever failed to repay its debts – so even a downgrade is bad news for the market.
US stocks looked set to slump at Wednesday's opening bell, with S&P 500 and Nasdaq Composite futures each down over 1% at 5 a.m. Eastern Time, per data from CME Group.
The Dow Jones Industrial Average was on pace to slip 0.8%, while flagship indices in Europe and Asia also traded lower.
There was better news for bonds and currencies, though – with 2-year and 10-year Treasury yields holding steady and an index that tracks the strength of the US Dollar roughly flat.
Has this ever happened before?
Yes, once.
S&P Global, another "Big Three" credit-rating agency, slashed the US government's debt-repayment score back in 2011 – and that also fueled a sell-off in riskier assets and a bounce for Treasurys as investors sought out safe havens.
What's Wall Street's reaction?
Fitch's downgrade is a fresh source of uncertainty for investors, who up until late Tuesday had been enjoying a near-perfect year in which both the S&P 500 and Nasdaq have racked up massive gains.
"When the debt of the world's largest economy is seen as lower quality, it will naturally trouble investors and make them rethink their portfolio," AJ Bell's head of investment analysis Laith Khalaf said.
"It also might surprise some people given how the US economy is proving to be more resilient than expected," he added, referring to the fact that growth surged and the job market held firm over the second quarter of 2023.
Meanwhile, Biden administration officials and top economists slammed Fitch's move.
US Treasury Secretary Janet Yellen said the decision was "arbitrary and based on outdated data," while one of her predecessors Larry Summers called the downgrade "bizarre and inept".