Zinger Key Points
- Fears of history repeating itself grip the financial world as the recent US credit downgrade by Fitch Ratings echoes a similar event in 2011
- Market reactions in 2011 were intense, with sharp declines in stocks, a rally in safe-haven assets like US Treasuries and gold.
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The recent downgrade of the US sovereign credit rating from AAA to AA+ by Fitch Ratings has brought back memories of a similar event occurred exactly 12 years ago.
On Aug. 6, 2011, S&P made history by downgrading the U.S. credit rating from AAA to AA+ for the first time since 1941.
S&P downgraded the nation’s credit rating in August 2011 after Washington avoided a default by temporarily increasing the debt ceiling, just as it did again in June of this year. Increased political polarization and a lack of action to improve the country’s financial situation led to this decision.
How Did Markets React To 2011 Sovereign Credit Rating Downgrade?
The U.S. credit downgrade was not the only negative news impacting the markets back then.
The eurozone was in the clutches of a sovereign debt crisis, with worries of PIGS — an abbreviation for Portugal, Italy, Greece and Spain — defaults.
As soon as the markets reopened on Monday, Aug. 8 following the weekend break, global stocks sold off. The sharp decline lasted through August and September.
S&P 500 index: The index of the 500 largest US corporations, also tracked by the SPDR S&P 500 ETF Trust SPY, declined by 80 points or 6.7% on the first day of trading following the downgrade. For the whole month, the S&P fell 5.7%, then dropped 7.3% in September 2011 before rebounding by 10.7% in October.
Dow Jones Industrial Average: The Dow Jones Industrial Average, tracking blue-chip stocks, experienced a plummet of 635 points or 5.6% on the Monday following the S&P downgrade. Subsequently, the Dow, as tracked by the SPDR Dow Jones Industrial Average ETF DIA, dropped 4.5% in August and 6.2% in September before rebounding by 9.5% in October.
Nasdaq 100 index: The index of technology firms fell 6.2% on the day following the U.S. rating downgrade. The tech-heavy index monitored by the Invesco QQQ Trust QQQ showed milder losses of 5.2% for the whole month of August. The index fell 4.5% in September before rising 10.3% in October.
VIX index: The “fear gauge” tracking market volatility skyrocketed 50% on Aug. 8, 2011. The CBOE volatility index rose by 25% for the whole month of August and then extended the gains by 35% in September 2011.
US Treasuries: Despite the downgrade, sovereign bonds rallied, as the risk-off environment prompted a flight to safety. Yields on the 10-year Treasury note tumbled by 78 basis points in August and by an additional 18 basis points in September, declining by a cumulative full percentage point in two months. In price terms, U.S. 10-year Treasuries gained 3.5% in August 2011.
US Dollar: The U.S. Dollar index (DXY), closely tracked by the Invesco DB USD Index Bullish Fund ETF UUP was only marginally higher (0.3%) in August 2011, but rallied 6% in September.
Gold: The precious metal, as tracked by the SPDR Gold ETF Trust GLD rallied 3.2% Aug. 8, 2011, to 12% for the month, outperforming other major asset classes. Yet he rally was short-lived, as gold erased all its gains in September, declining by 11%.
Table: Market Reactions To 2011 US Credit Downgrade
| Asset Class | August 8, 2011 | August 2011 (monthly return) | September 2011 | October 2011 |
|---|---|---|---|---|
| S&P 500 index | -6.7% | -5.7% | -7.3% | +10.7% |
| Dow Jones Industrial Average | -5.6% | -4.5% | -6.2% | +9.5% |
| Nasdaq 100 index | -6.2% | -5.2% | -4.5% | +10.3% |
| VIX index | +50% | +25% | +35% | -30.3% |
| U.S. 10-year Treasury | +1.2% | +3.5% | +0.1% | -0.8% |
| U.S. Dollar index (DXY) | +0.3% | +0.3% | +6% | -2.6% |
| Gold | +3.2% | +12% | -11% | +5.6% |
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