Moody's Cuts US Credit Rating To Negative, Does Anyone Really Care?

This past Friday after the stock markets closed Moody’s downgraded the US credit to negative outlook because of a variety of fiscal and political factors, but affirmed its Aaa credit rating. If that makes no sense to you, join the club. It appears this is a warning about concerning behavior, rather than actually paying debts.

As it pertains to you and I, if we pay all of our debts on time, but we’re continually racking up more debt, consumer credit agencies lower our scores immediately.  They don’t send us a courtesy email and say they’re concerned about our financial behavior. The difference is the US is seen as both the most politically and financially stable country in the world, capable of paying it’s bond holders. However, does anyone really care about the Moody’s downgrade? In my opinion, yes and no.  In America we’re known for doing the right thing.  We’re not known for doing the right thing…fast. Therefore, I think the US, and by extension, the world, gets concerned only when there’s enough negative fallout from this behavior.  

But what about the stock markets? Should they care?

Wall Street is predictable to act in its own self-interest.  If the markets are truly concerned about rising interest rates, there is only one way to send a message to politicians to get it together.

Decline.

The most prominent example of this was front and center during the congressional vote on the TARP legislation in 2009.  This is the law that allowed the US to bailout the banks who had underwritten all those phony mortgages. The same bailouts that politicians railed against to the public. The Troubled Asset Relief Program legislative vote in congress was being carried live. As the votes were being tallied and displayed on TV’s across the world, the moment there no longer existed a path to passage, the Dow Jones plunged 1,000 points in a manner of minutes.  Suffice to say, there was a quick revote the next day, and overnight, many politicians against bailouts got religion. The exact same outcome happened during legislation to stem the economic damage from the global Covid-19 pandemic. The Pandemic Stimulus Bill was equally hated by politicians…but once the Dow dropped almost 600 points the day prior to the vote, it passed.

Although there are many groups and individuals worried about the US’ fiscal stability, rest assured, Wall Street is not one of them. The markets are acting like its smooth sailing only 6% below all-time historic highs. No one wants that sugar high to end till 2023 is over. The Stock Market narrative is that 2024 will be the  year to start worrying about all this negative stuff. However, if interest rates are the main culprit of an economic slowdown or recession, then the Moody’s negative outlook watch is certainly not going to help keep interest rates lower or even flat. This will undoubtedly have an effect on bonds across the entire maturity curve keeping rates higher.

So, who should care? You, the little guy, the average joe. You’re the last to know when to sell, shift, reallocate, etc. The characteristics of a massively declining stock market is already taking effect right underneath your noses. Let’s just take one characteristic that is particularly alarming. The small cap publicly traded companies are now trading almost 5 standard deviations away from its large cap counter parts.  

The S&P 500 and the Russell 2000 trade in tandem 63.79% of the time. The other 36.21% they are not, they trade opposing one another on average for 3 months, but eventually return to tandem. As of Friday’s close, that deviation is now 13 uninterrupted months. After deviating from one another it’s typically the S&P 500 that trades towards the Russell to resume tandem trading. By today’s standards, that would mean the S&P 500 would have to decline a minimum of 27% to resume tandem trading.

In 2008-2009 only a handful of people on planet Earth had an idea of what was taking place and the potential carnage that awaited Wall Street and by extension, you. Many earners who spent a life time accumulating a retirement nest egg saw their life’s work vanish in a short order.

Moody’s is just a shot across the bow so to speak. Does anyone care? 

I think you should care.

Chris Maikisch started his career in retail investment banking and quickly switched over to analyzing markets using his firms’ proprietary methods. In 2012 he began studying Elliott Wave Theory and now uses this methodology exclusively as lead analyst at EWTdaily.com covering tier-1 cryptocurrencies and the US stock market indices.