Stocks Fall As Fitch Downgrades The U.S. Debt Rating

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In his Daily Market Notes report to investors, Louis Navellier wrote:

U.S. Debt Rating Downgraded

Fitch downgrades US debt to AA+, stocks fall around the world.

Fitch cut the U.S. debt rating to AA+, after putting it on Watch in May, joining S&P which dropped it to AA+ in 2011. If this were a corporate rating, it would now be classified as a AA+ credit in the Indexes, which could be a major headache for structures calling for AAA-rated collateral, but after the S&P cut it seems that many people changed their definition to debt backed by the full faith and credit of the US government to sidestep that possibility.

After an hour of trading, all the major stock indexes are lower on the news, with the Indexes which have had the best YTD performance taking the most heat as some investors choose to lock in profits. It’s still a cause for concern inasmuch as the elephant in the room for the global economy is the record levels of debt that spiked during the pandemic and is now being refinanced at much higher rates due to central bank tightening to address inflation and give themselves room to cut rates if a recession takes place.

Cleanest Dirty Shirt

The US in particular has plans to continue to generate multi-trillion dollar budget deficits despite solvency questions about the gigantic Social Security and Medicare programs. The logic, however, is that if sovereign debt starts to come under pressure, that flow will come out of the weakest countries and come to the US as “the cleanest dirty shirt in the laundry”.

Ugly Day

Today, the 10yr yield is above 4.11%, the highest since Nov’21, and international yields are following the move. Stocks are drifting lower as the morning progresses, turning into the ugliest day since May as the market was vulnerable to any significant bad news given the stellar YTD returns and high valuations.

Buying Opportunity

Currently, the technology sector has a forward P/E of 28X, which is 45% above average. Consumer Discretionary is at 27.5X, 23% above average. The overall S&P 500 is at 19.8X, though without the Megatechs, it’s 17.3X, high levels when hoping for a soft landing, more so when the alternative is 5% sitting in cash. In the big picture, some kind of a pullback was overdue, after the sizzling run we’ve had, at least we can identify the reason today.

We aren’t anywhere near the same damage as occurred in 2011 when S&P cut the US rating; when that happened the S&P dropped 6.7% and the NASDAQ fell 6.9% on the first day following the downgrade. If earnings continue to be strong, it’s likely today will be seen as a buying opportunity in short days.

Coffee Beans: Work Hard, Play Hard

Toy company Mattel has announced it is on the lookout for its first-ever “Chief UNO Player” to spearhead its newest addition, UNO Quatro. The $17,776 job will reportedly require four hours of attendance per day, four days a week for four consecutive weeks. Source: Sky News. See the full story here.