Exec Summary
The United States’ Credit Rating was downgraded recently. This should not have a direct impact on the average consumer and investor…today…but it could be a signal that both stock and bond markets may become more volatile as some large market participants who fund (and trade in) the US Treasury markets adjust their portfolios to reflect the new average credit rating.
What it means to you – if you’re an individual investors, more market volatility often demands paying more attention to the level of risk that may be in your portfolio.
What Happened
Recent world financial headlines focused on the news that Fitch, one of the big three debt credit rating firms, downgraded the US Credit Rating. Most of the conversation has been political and the only thing both sides seem to agree with is that the other side is at fault. Instead of trying to sort that out, let’s take a look at what these ratings really are, what Fitch said in their rating announcement, and how this plays out in the markets and economy.
What’s a Debt Rating Firm
There are three big ratings organizations and they’re all subsidiaries of big household name corporations. Fitch (owned by Hearst Corporation, owners of WLWT-TV here in Cincinnati), Moody’s (owned by Warren Buffet’s Berkshire Hathaway) and Standard & Poor’s (owned by McGraw-Hill, the book publishers). These three firms are the investment world’s primary source of sentiment in the huge, complex debt market – in effect giving the world their opinion of a bond issue’s future…is the bond likely to be safe, risky or somewhere in between.
What’s a Credit Rating
An organization’s credit rating (or in this case a country’s credit rating) is pretty much the same as your personal credit score but a little more complicated since every company has its own scale. That makes it hard to create some single number but it’s the same idea. Last week’s Fitch downgrade from AAA to AA+, effectively moving their assessment of our creditworthiness from Outstanding to Excellent. When combined with ratings from Moody’s and Standard & Poor’s, the US continues to be one of the safest markets to hold debt. In fact, most economists have come around to the position that Fitch’s “downgrade” isn’t going to have much effect on anything.
So…why did they do it?
According to their press release, Fitch pointed to “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”
That’s a mouthful.
My take
This is their way of telling the US Government to “get your debt under control and stop arguing about whether you’re going to pay your bills or not”. I’m not sure we needed a ratings agency to tell us that but maybe seeing it in the headlines will help folks understand that we’re entering a time where there could be some meaningful financial consequences if we don’t do both – get our fiscal house AND our political house in order.
The key question –
Will our political leaders pay attention to the warning shot or will they need more messages from the economy, the market, and the rating services to get it all together? Until then, we’ll be keeping watch on market volatility and dynamically managing the risks that may exist in our portfolios.
Contact Dinergy to find out more about how we take care of our clients and offer portfolios that help manage investment volatility and risk. Give us a call 513.878.0195 or email us. info@dinergywealth.com