US debt downgrade by Fitch is no cause for panic

Stocks fell last week after Fitch downgraded US debt from AAA to AA+. Should investors care? Many prominent economists – treasury secretary Janet Yellen, Larry Summers, Paul Krugman, Allianz’s Mohamed El-Erian, among others – were scathing about Fitch’s decision.

However, the mood was more irritated than concerned. This year is not 2011, when S&P became the first credit ratings agency to strip the US of its AAA rating. Stocks promptly sank, but indices were tumbling even before S&P’s downgrade, during what was a turbulent time for the global economy. 2011 was a bearish environment for stocks; 2023 is anything but.

[ Global shares fall as investors digest downgrading of US credit rating ]

Fitch, as Wells Fargo notes, is a “distant third” to the main ratings agencies, S&P and Moody’s. Nor was its move a big surprise, given it put US debt on negative watch status in May. As UBS economist Paul Donovan notes, markets care about the fiscal position of the US – they don’t care about the opinion of the ratings agencies. With stocks technically overbought, Fitch’s downgrade represented an excuse to sell, not a reason.