On Friday last week, Moody’s stripped the US government of its AAA credit rating. The credit rating agency said the downgrade “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”
It also warned that the federal debt is on track to hit 134% of GDP by 2035, up from 98% last year.
Unlike downgrades in the past, the stock market pretty much shrugged off the news as a nothingburger.
But what I found interesting is the timing of the announcement.
Why now? And what took them so long?
Moody’s is (very)late to the party
We’ve seen this before – twice, to be specific.
The other two big ratings agencies — S&P Global Ratings and Fitch — have already downgraded America’s AAA credit rating. S&P in 2011, and Fitch in 2023.
To be fair, Fitch was also late. After all, US debt has nearly doubled over the last 10 years. Since Covid, debt is up roughly $13 trillion or nearly a third.
Apparently, you need debt to rocket to unsustainable levels before concluding that the US might not be experts at fiscal discipline.
It’s probably why traders and investors largely ignored the news. US’s high debt levels are not a surprise. Many have been warning about its unsustainable path.
On the other hand, rating agencies aren’t flush with integrity. Remember, these are the same folks who rated junk mortgage bonds as AAA right until they detonated in 2008 – leading to the Great Financial Crisis.
What does this credit rating downgrade mean for you as an investor?
Interestingly, history says any volatility from the Moody’s downgrade will be a buying opportunity.
After the 2011 S&P downgrade, stocks traded sideways for two months – then rallied. Six months later, the S&P 500 was up 12%.
And after the 2023 Fitch downgrade, the pattern repeated. Three months of volatility – then a rally. Six months later, up 7%.
Of course, past performance is not indicative of future performance. But there are reasons to be bullish on certain stocks – easing trade tensions, a hot AI market and great earnings results.
Nevertheless, Moody’s downgrade is just another reminder that the foundations of the US financial system are cracking – and something needs to be done to reign in debt.
As the cracks widen, gold (and Bitcoin) remain an effective hedge. Find out what we like in crypto when you join the South African Investor community here.
Not a subscriber to Money Morning?
You can get free daily recommendations like these with Money Morning eletter. Just sign up here.
