For the second time in the nation’s history, the U.S. debt rating was downgraded by a rating agency, Fitch Ratings, from the highest rating, AAA (Exceptionally Strong), to AA+ (Very Strong). The last time this occurred was in 2011 when Standard & Poor’s (S&P) stripped the U.S. of its triple-A rating. The news doesn’t come as much of a surprise, as Fitch first indicated the possibility of a downgrade back in May.
What is Fitch Ratings?
Fitch Ratings is a company recognized throughout the professional world as one of three Nationally Recognized Statistical Ratings Organizations (NRSROs) approved by the U.S. Securities and Exchange Commission (SEC). Moody’s and Standard & Poor’s (S&P) are the other two.
Why Did Fitch Downgrade the United States’ Rating?
The reason for the downgrade is a “steady deterioration in standards of governance over the last 20 years, including fiscal and debt matters,” the rating agency said. Analysts and investors view this downgrade as more politically motivated out of Washington than financially out of Wall Street.
How did the market react; should investors be worried?
Expectedly, the market reacted negatively to the news, and according to CNBC: Stock Market & Business, the NASDAQ Composite experienced its worst day since February, dropping 2.17%. The S&P 500 fell 1.38% and the Dow Jones Industrial, 0.98%. Regarding investment decisions, financial professionals indicate that ratings are just one factor.
Are there any repercussions from the downgrade?
Potential effects of the downgrade could be higher borrowing costs and increased rates for credit cards, consumer loans, and mortgages which could strain American consumers' wallets. People are still dealing with the pandemic's financial effects, and many have dipped significantly into their savings. In October, those with large college loans will have to start repaying them, which may add to the financial stress they are already experiencing.
According to ABC News, analysts suggest the economic threat posed by the rating announcement and the financial impact on the finances of everyday people would be long-term rather than immediate. The opinion of a market analyst was that the stock downturn is only temporary, considering economic conditions remain fundamentally steady as inflation decreases and job growth increases.
What can investors do during this uncertain time?
As an effect of the downgrade, a rate increase could boost yields from the money you have in your savings account. This occurs because banks borrow your money, and the institution pays you interest in return. You may also consider buying bonds, as bond prices typically decrease when the rates increase. However, investing in bonds will expose you to interest rate risk – changes in the interest rate. There are always options available, and it is encouraged that you consult a professional to learn what strategy may work best for you and how to manage risk. To learn more about how the credit downgrade could impact your financial situation or long-term goals, schedule an appointment today with a financial professional and make your money work for you.
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Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. All indexes are unmanaged and cannot be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
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This article was prepared by LPL Marketing Solutions
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