Why Stock Markets Ignored Moody's Downgrade
Last Friday, after stock markets closed, Moody’s downgraded the U.S. credit rating by one level. Treasury yields rose after the ratings agency lowered the rating to Aa1, down from Aaa.
Markets ignored the lower ratings change because they are now in line with their peers. Still, Moody’s said the federal government has challenges financing its budget deficit. In addition, renewing current debt at higher borrowing costs is a negative development.
On Monday, investors initially dumped the 20+ Treasury Bond ETF (TLT). But by the end of the day, TLT stock dropped by only 29 bps, closing at $86.05. Bank stocks did not react to the rating change. JP Morgan (JPM) dropped by 1.00%, while Bank of America (BAC) and Citigroup (C) traded flat on the day.
Investors are not concerned that demand for U.S. debt will change. Other countries have a worse debt profile. Foreign investors would prefer holding U.S. Treasury bonds, just as they did in the last 10 years.
Long-term investors may continue to hold ETFs that track the S&P 500 (IVV). The SPY, VOO, and IVV ETF are the most ideal. They perform well with the magnificent seven technology stocks. Microsoft (MSFT), Apple (AAPL), and Nvidia (NVDA) are the most appealing. However, Tesla (TSLA) offers the least growth compared to its lofty P/E.
