U.S. Credit Downgrade Cools Markets

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

Equities sold off last week in response to Fitch’s downgrade of the U.S. credit rating.  On the earnings front, 84% of S&P 500 companies have reported 2nd quarter earnings and 79% have reported earnings above estimates.  Those numbers are higher than both the 5-year average (77%) and the 10-year average (73%).  Investor sentiment has been in the “risk-on” mode since May, which is evident in the Goldman Sachs Sentiment indicators.  However, momentum was doused by cold water as Fitch announced on Tuesday of last week that they were downgrading the U.S. credit rating from AAA to AA+.  This has happened once before in August of 2011 when S&P downgraded the U.S. credit rating.  Markets reacted more harshly in 2011, selling off more than 6% in the aftermath.  But, just like in 2011, Fitch declared the U.S. outlook as “stable,” meaning the current rating is likely to stay put. 

It should be no surprise that we get a little pause in momentum in the markets as August is the worst month of equity ETF and mutual fund flows.  In addition, the S&P 500 Index has been higher 3 of the last 4 months.  Meanwhile, the jobs data was positive overall last week.  While the government's report came in lower than expected, July's 187,000 jobs added was higher than June's 185,000 figure.  Average Hourly Earnings increased to +4.4% year-over-year.  The unemployment rate declined to 3.5% and the number of available jobs remains elevated.  With unemployment at historically low levels, wage growth remaining strong and inflation having declined below wage growth, there is reason to believe that consumers can maintain spending momentum.  The inflation data and a few Fed speakers should make trading interesting this week. 

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