Trends in the U.S.’ Fiscal Standing: What to Make of Fitch News?

Summary:

Trends in the U.S.’ Fiscal Standing

The recent Fitch downgrade of the U.S. credit rating, from AAA to AA+, has been questioned in terms of its timing and likely impact on markets.  But it has raised some questions…

In this latest edition of LPL Street View, we examine the potential impact of the Fitch news, which we believe will be minimal in the near-term. However, we will also take a brief longer look at the message Fitch may be delivering in its most recent fiscal assessment.

A Look Back

In 2011, S&P, a credit rating agency similar to Fitch, downgraded the U.S. credit rating to AA+ from AAA.  At the time, the S&P news was somewhat startling as the U.S. had maintained an AAA credit rating for decades. The S&P cited primary reasons for the downgrade, which included the nearly-annual debt-ceiling political brinksmanship and the lack of a credible plan to tackle the nation’s long-term debt. As a result of the S&P news, Treasury yields fell and stocks dropped for a few days before recovering.  Markets, in fact, moved on rather quickly.

What Now?

So what do we make of the Fitch news? We are not expecting an overly material market reaction as a result of Fitch’s action, and indeed we have not seen one at the time of this taping. Why? Because it is already known news. In fact, Fitch has only now moved their U.S. credit rating (now AA+) to a point that matches S&P action taken 12 years ago. There is nothing really new about the Fitch proclamation.

However, we believe the S&P action in 2011 and the Fitch news is a trend that may persist in years to come unless the U.S. government gets serious about its fiscal management. 

Here we are looking at projections from the Congressional Budget Office, which point to what we believe is an unsustainable U.S. deficit and debt trajectory. Both S&P and Fitch have indicated as much in their own assessments.

But let me be clear about a couple things:  In the near and intermediate term we do not believe the Fitch news or the current U.S. budget problems will materially alter the course of the economy and the market.  Nor do we believe this is another immediate step toward the dollar losing its reserve currency status. The U.S.’s place on the fiscal world stage and the dollar’s place as the world’s reserve currency will likely persist through the balance of my lifetime.

What we are suggesting is the U.S. government indeed has adequate time to refocus on sound fiscal management….but they need to put that time to good use. We encourage both political parties to see their way clear toward doing just that. Because if they don’t, the problem gets more difficult to solve, and we may see credit rating agencies take further action in the years ahead.

Thanks for listening and as we always say at LPL Research—allocate wisely.

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