‘Emperor’ Daimon Also Says "Not That Important"... Impact of US Credit Rating Downgrade Seen on Wall Street (Comprehensive)

"It is not very important." "It is merely a warning to Washington politics."

Although the international credit rating agency Fitch downgraded the United States' sovereign credit rating on the 2nd (local time), causing global stock markets to fall simultaneously, Wall Street analysts largely agree that the impact will be 'limited.' This is because the economic conditions of the U.S. today are completely different from those 12 years ago when the New York Stock Exchange plunged double digits and the bond market was shaken within just a week. Jamie Dimon, CEO of JP Morgan Chase, known as the 'Emperor of Wall Street,' also dismissed the potential impact of this event on the financial markets.

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Fitch's official reason for downgrading the U.S. credit rating from 'AAA' to 'AA+' late the previous day was the prolonged political conflict (governance) over raising the federal government's debt ceiling, anticipated fiscal deterioration, and the national debt burden. This was the first downgrade of the U.S. credit rating by a major international rating agency since S&P in 2011. The move immediately triggered risk aversion, delivering a direct blow to Asian stock markets. European markets, which opened after the Asian close, recorded declines of over 1%, and the New York Stock Exchange also fell across the board. The Dow Jones Industrial Average, composed of blue-chip stocks, closed down 0.98% from the previous session. The S&P 500, focused on large-cap stocks, dropped 1.38%, and the tech-heavy Nasdaq fell 2.17%. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's 'fear gauge,' surged over 15%, surpassing the 16 level.

However, considering the recent five-month rally in the New York Stock Exchange, the decline on this day is seen more as profit-taking and overheating correction rather than a 'downgrade shockwave' like in 2011. The ripple effects confirmed in the New York bond and foreign exchange markets were relatively minor. The Dollar Index, which shows the value of the dollar against six major currencies, continued its strength. U.S. Treasury yields showed mixed trends with relatively small fluctuations. There was no rapid selling or buying pressure to be concerned about. Joasim Clement, head of Liberum Capital, said, "There is no alternative to U.S. Treasuries in the global bond market, and there is no significant risk of default over the next 10 years," adding, "All of this is just a 'storm in a teacup.'"

Wall Street also unanimously predicts that this credit rating downgrade will not have a major impact on the market. In an interview with CNBC, CEO Dimon criticized Fitch's downgrade decision as "ridiculous." He emphasized the safety of U.S. Treasuries, saying the impact of the downgrade is "not very important" and "the market decides, not the rating agencies." JP Morgan Chase also stated in a memo sent to investors late the previous night, "After S&P's downgrade in 2011, the Treasury market was very volatile, but the foundation of the U.S. economy was very different then," and "We do not expect similar volatility in the coming weeks." At that time, the reduction in fiscal spending relative to U.S. GDP was 0.7%, whereas in 2023 it is only about 0.2%. The unemployment rate also differs significantly from the 9% level in 2011.

Chris Harvey, head of equity strategy at Wells Fargo, also noted, "At the time of S&P's downgrade in 2011, the U.S. stock market was in a correction phase, credit spreads widened significantly, and interest rates fell in a 'risk-off' mode," adding, "Currently, we are in almost the exact opposite situation." He predicted, "The market decline will also be relatively short and shallow." Brook May, managing partner at Evans Maywells, said, "(The downgrade) is disappointing, but I do not think it will have a meaningful short-term impact on the economy."

During the S&P downgrade 12 years ago, U.S. stock prices fell by up to 15%. On the first trading day after the downgrade, the S&P 500 dropped nearly 7%. However, Wall Street also notes that the S&P 500 rose over the following 12 months. Jason Ware, chief investment officer at Albion Financial Group, said, "Although stock prices fell sharply immediately after the downgrade 12 years ago, it was ultimately confirmed to be a buying opportunity," adding, "There will not be many investors selling stocks because of this downgrade." He explained that this could also serve as a buying opportunity after profit-taking and short-term correction this time. Mona Mahajan, senior investment strategist at Edward Jones, said, "Investors may use Fitch's downgrade as a reason for profit-taking," but "this event does not change our fundamental view of the U.S. economy and market."

On the contrary, some voices question the timing of this credit rating downgrade. This is because expectations for a so-called 'soft landing,' lowering inflation without a recession, have recently grown stronger. Wendy Edelberg, senior fellow at the Brookings Institution think tank, pointed out that compared to when Fitch placed the U.S. on 'negative watch' (May 24), "It is hard to understand how the current situation is worse than before the debt ceiling crisis was resolved." Former Treasury Secretary Larry Summers criticized the decision as "bizarre and inept" given the economy is stronger than expected. U.S. Treasury Secretary Janet Yellen, visiting the IRS in McLean, Virginia, called it an "entirely unfair decision," stating, "Fitch's decision is perplexing given the strong economy we are experiencing in the U.S. It does not change the fact that U.S. Treasuries are the world's safest asset and that the U.S. economy is fundamentally strong." Moody's, one of the three major credit rating agencies, still rates the U.S. credit as the highest.

Ultimately, this decision is interpreted as a strong warning to Washington politics. The chronic 'brinkmanship' between the parties amid worsening national debt is damaging the U.S.'s fiscal credibility. Harvard University professor Jason Furman said, "The downgrade is more open to political interpretation than economic factors." Managing partner May also assessed, "This is merely a warning to Washington politics." It shows the reality that even the U.S., as the issuer of the world's reserve currency, cannot avoid a decline in national creditworthiness if fiscal soundness deteriorates. There are concerns that further downgrades could further jeopardize the federal government's fiscal health. On the same day, CEO Dimon also acknowledged concerns about the uncertainty stemming from Washington, which Fitch cited as a reason for the downgrade, saying, "The debt ceiling must be removed. It is causing market uncertainty."

This content was produced with the assistance of AI translation services.