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

Last Edited by: LPL Research

Last Updated: August 02, 2023

LPL Research Street View image

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.

Please continue to follow LPL Research on Twitter, LinkedIn, and YouTube for more insight.

Read. Listen. Watch.

Keep up with economic insights from the LPL Research team. Read Weekly Market Commentary. Listen to Market Signals Podcast. Watch Street View.

LPL Newsroom

Thought leadership. Advisor stories and tips. And, Research. Find the latest insights from advisors, what’s new for advisors, and the latest from LPL Research.

LPL’s Thought Leadership Series

Throughout the year, LPL’s Thought Leadership team takes a look at those things that impact and help advisors, providing advisor stories and advisor solutions.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data is from FactSet.

Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.  

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Not Insured by FDIC/NCUA or Any Other Government Agency

Not Bank/Credit Union Guaranteed

Not Bank/Credit Union Deposits or Obligations

May Lose Value

RES-1607096-0723 | For Public Use | Tracking # 1-05376768 (Exp. 08/2024)