What the Moody’s downgrade means for markets

Investing.com -- Moody’s downgraded U.S. sovereign debt late Friday, prompting a wave of headlines and a weak market open on Monday. 

However, according to the latest Sevens Report, the move is unlikely to drive long-term market direction.

“Moody’s downgraded U.S. sovereign debt to Aa1 from Aaa. That downgrade boosted long-term Treasury yields, as some investors sold long-term Treasuries,” the analysts wrote. 

Stocks opened lower Monday, but Sevens emphasized that the downgrade “revealed nothing new.”

Moody’s cited two familiar concerns. Sevens explained that first, there is “a lack of progress from numerous past Congresses and administrations to address rising fiscal deficits,” and secondly, there is “growing interest costs as a percentage of GDP.” 

But Sevens called the timing questionable: “Downgrading U.S. debt for larger deficits and rising interest costs is the financial equivalent to saying ‘water is wet.’”

The downgrade follows similar moves from S&P in 2011 and Fitch in 2023. 

Sevens said, “There’s been no dramatic deterioration lately,” and noted that speculative fears tied to potential legislation “don’t justify the downgrade.”

While the downgrade may pressure stocks briefly, Sevens sees little long-term impact. 

“The deteriorating fiscal situation hasn’t stopped stocks from rallying over the past few years and that’s unlikely to change anytime soon.” 

The firm believes rising Treasury yields could weigh on equities, but “they will rise mainly because of growth and inflation expectations, not in reaction to Moody’s downgrade.”

Sevens said markets will be driven instead by “1) Tariff policy (more tariff reduction), 2) Economic growth (can the U.S. avoid a slowdown) and 3) Fed policy (will they cut rates in the next few months?).”

As for the broader fiscal picture, “The U.S. fiscal trajectory is unsustainable in perpetuity,” Sevens warned — but added, “It’s just not something that should cause you not to be in the market for the foreseeable future.”