Will a Surprise Downgrade of the U.S. Credit Rating Derail the Stock Market Rally?
The question now is if the news will accelerate rotation out of U.S. assets. Here's what to watch.
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A surprise downgrade Friday of the United States' credit rating by Moody's Ratings will provide the bears with some fresh ammunition on Monday morning. Bonds reacted quickly, with the 30-year Treasury yield moving over 5% for the first time since November 2023. Equities are also lower across the board with the S&P 500 trading down 1.2% in the early going. Gold is recovering from some of its recent pullbacks.
Treasury Secretary Scott Bessent is dismissing the debt downgrade as a "lagging indicator" that is related to the Biden administration's spending policies. However, the timing creates additional pressure on Republicans in Congress to focus more on the spending in Trump's Big Beautiful budget bill.
While many strategists believe that the credit downgrade will have a limited impact on equities, there is concern that it may accelerate rotation out of U.S. assets, which has been ongoing for a while now. The dollar and bonds are dropping sharply as there is more movement out of U.S. assets.
The news of the debt downgrade hit after an exceptionally strong week for stocks following the cut in China tariffs. There is more optimism about trade and tariffs, but Secretary Bessent indicated over the weekend that if progress is not made in a 90-day period, then tariffs are set to rise again. The market ignored the fact that the tariff changes were temporary and may start to worry again as the 90-day period approaches an end.
Technically, stocks are vulnerable to a pullback at this point after the very frothy action last week. The bulls made a euphoric move on Friday that left the indexes overbought and extended as they approached key levels of overhead resistance.
The big question is how quickly dip buyers might show up. There have not been any major pullbacks in almost a month, and the news flow may give the dip buyers some pause. There is also a big gap on the charts from last Monday when the China tariff reduction was announced.
Typically, the first pullback after a big run is bought quickly, but if a bounce fails, then the subsequent pullbacks will gain more traction.
As I mentioned last week, I cut some deadwood and raised cash levels. My game plan is to watch for support levels to form in individual stocks that I like, but I want to see how willing the dip buyers are to jump in.
This news flow is problematic and may keep some folks on the sidelines. The uptrend is being threatened by this news, but so far the selling isn't intense enough to kill it.
At the time of publication, Rev Shark had no positions in any securities mentioned.
