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US Stocks Suffer Worst Losses in Six Months Following Fitch’s Credit Rating Downgrade

© AP Photo / Peter MorganA man walks past the New York Stock Exchange, Wednesday, Sept. 21, 2022, in New York.
A man walks past the New York Stock Exchange, Wednesday, Sept. 21, 2022, in New York.  - Sputnik International, 1920, 02.08.2023
On Tuesday, international credit rating firm Fitch downgraded the US government’s credit rating, citing fiscal instability in the wake of another recent budget showdown that risked a federal government default.
US stocks posted big losses on Wednesday, with the Nasdaq suffering its worst loss in six months after losing 2.17% of its value, or 310.47 points, closing at 13,973.45.
Other indices suffered as well, with the Dow Jones Industrial Average losing 348.16 points, or 0.98% of its value, to close at 35,282.52. The S&P 500 lost 1.38% of its value, dropping by 63.34 points to close at 4,513.39.
A day prior, Fitch Ratings announced it was downgrading the US federal government’s credit rating from AAA to AA+, the second time it has done so and for the same reason as the first: shaken confidence in the US government to properly handle its debts.
"The rating downgrade of the United States reflects 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," Fitch said.
In this Nov. 23, 2020, photo, a street sign is displayed at the New York Stock Exchange in New York. S&P DJ Indices is removing 21 Chinese companies from its indexes, or groups of stocks and bonds used to track financial market movements, after Americans were barred from investing in them as part of a feud with Beijing over technology and security. - Sputnik International, 1920, 27.07.2023
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The decision came after congressional Republicans stonewalled raising the debt ceiling for months, using the threat of a government default to pressure Democrats into agreeing to stiff budget cuts. A deal was finally reached in early June, possibly just days before the Treasury predicted a default might occur. The last time the US’ credit rating was downgraded was in 2011, following a nearly identical showdown.
“Investors may use this Fitch downgrade as a reason to take some profits, but we think that was probably a natural part of the market cycle anyway, after such a strong run, very little volatility,” Mona Mahajan, senior investment strategist at Edward Jones, told US media. “Broadly speaking, this hasn’t deterred our fundamental view of the economy or markets.”
Jamie Dimon, the CEO of JPMorgan Chase, the world’s largest bank by capitalization, told US media on Wednesday that the downgrading “doesn’t really matter that much,” but still called it “ridiculous” that other countries that depend on the US, such as Canada, have a higher credit rating than Washington.
“To have them be triple-A and not America is kind of ridiculous,” Dimon said. “It’s still the most prosperous nation on the planet, it’s the most secure nation on the planet.”
Fitch Ratings - Sputnik International, 1920, 02.08.2023
What are Fitch Ratings and What Does US’ Downgrade Mean for Other Nations?
The downgrade also helped push the yield on the 10-year US Treasury bond to its highest point since last October and also edged the yield on the 2-year Treasury bond up higher as well. The two remain in what economists term an “inverted yield curve,” meaning the longer-term bonds are worth less than the short term - a telltale indicator that investors anticipate a recession in the coming months.
According to news reports, the bond markets were also responding to news that the US Treasury would be selling off another $103 billion worth of securities next week, including 3-year, 10-year, and 30-year debts.
A number of other factors also contributed to the losses on Wednesday, including tech stocks that suffered following news that China would limit daily smartphone use for minors.
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