Fitch's 2023 Downgrade: Assessing the Impact on the US and Equities
Fitch Ratings' recent downgrade of the United States' credit rating in 2023 has triggered discussions about its potential consequences for the US economy and financial markets. While the downgrade could be perceived as a setback, it is crucial to delve deeper into its implications and understand why experts believe the impact might not be as severe. In this blog, we will explore the rationale behind Fitch's decision, examine the performance of the S&P 500 since the last downgrade in 2011, and discuss why the credit downgrade does not alter the outlook on equities.
The Fitch Downgrade: Unraveling the Context
In 2023, Fitch Ratings downgraded the US credit rating, which could raise concerns about the country's ability to manage its debt obligations effectively. However, it is essential to note that the downgrade is not a direct response to the economic cycle or a signal of an imminent default risk. Instead, it reflects concerns about political uncertainties and fiscal challenges in the country.
The US Economic Foundation: A Strong Pillar
Despite the downgrade, the US economy stands on a robust foundation, supported by various positive indicators.
A resilient consumer base, slowing inflation, a healthy job market, and improvements in the housing and manufacturing sectors underline the economy's stability and growth potential. The downgrade is not related to growth forecasts, indicating that the US economy remains on a solid track.
S&P 500 Performance: Learning from History
One way to assess the impact of the Fitch downgrade is to look at the performance of the S&P 500 since the last downgrade in 2011 (HINT: It's up over 300%1).
The period between 2011 and 2023 has witnessed impressive growth in the stock market, proving that factors beyond the credit rating play a significant role in shaping equity performance. Economic fundamentals, corporate earnings, and investor sentiment all contribute to the stock market's trajectory.
Equities: A Bright Spot Amidst Downgrade Concerns
Flagship analysts maintain their stance on overweighting equities, even in light of the recent credit downgrade. Several factors contribute to this positive outlook:
- Expectation for a Better Economy: Our analysts anticipate an improvement in the US economy in the coming months. As economic conditions strengthen, corporations are likely to report stronger-than-expected earnings, bolstering stock market performance.
- Falling Inflation: The recent decline in inflationary pressures offers relief to the economy and financial markets. Lower inflation rates can result in higher real returns for investors, making equities an attractive option.
- Positive Technical Trends: Technical indicators point to positive trends in equities. Bullish market sentiment, coupled with strong investor confidence, suggests that stocks may continue to outperform bonds throughout the year.
- No Direct Response to Economic Cycle: The downgrade is not a direct consequence of the economic cycle or an indication of genuine default risk. It highlights the importance of addressing fiscal challenges and responsible debt management.
While Fitch's 2023 downgrade of the US credit rating may initially be seen as a setback, its implications may not be as severe as some fear. The S&P 500's impressive performance since the last downgrade in 2011 underscores the resilience of equities, which are influenced by numerous factors beyond the credit rating. With a strong foundation in the US economy, positive expectations for better growth, and attractive technical trends, equities continue to be a preferred investment option. By maintaining a long-term perspective and embracing a diversified approach, we can navigate the uncertainties of financial markets successfully.
Investment advice offered through Stratos Wealth Advisors, LLC, a Registered Investment Advisor. Stratos Wealth Advisors, LLC and Flagship Financial Advisors are separate entities. Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Flagship Financial Advisors, or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Flagship Financial Advisors.