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Follow on Google News | U.S. debt downgrade – Does it matter?By: Edward Jones
Stocks experienced their first 1% down day since May, and the 10-year Treasury yield rose to a fresh high for the year, flirting with last year's cycle peak of 4.25%1. Are last week's developments significant enough to alter the outlook for the markets, and what's the message that bonds are sending? The 2011 experience and how it differs from today When the U.S. lost its AAA rating from Standard & Poor's more than a decade ago, a decision that has not yet reversed, it triggered a 4.8% decline in the S&P 500 the day of the announcement on August 4 and another 6.5% decline on August 81. Stocks remained volatile over the following two months. But counterintuitively, investors gravitated toward government bonds and the U.S. dollar as safe havens against the uncertain backdrop. Last week's stock-market reaction to the Fitch downgrade was more muted, which we think is justified. Besides investors having now gone through a similar event for which there was no precedent in 2011, there are some stark differences in the economic landscape. Heading into another standoff over the debt limit and S&P's downgrade in 2011, investor sentiment was fragile, with the memories of the Global Financial Crisis (GFC) fresh, economic growth anemic, unemployment elevated at 9%, and credit spreads wide. In contrast today, the economy has been growing at an above-trend pace over the past four quarters, the unemployment rate at 3.5% is near historic lows, and credit spreads are narrow. Source: 1. Bloomberg End
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