Market Snapshot
By the Numbers
- Credit Rating service Moody’s downgraded U.S. debt from Aaa to Aa1
- The current U.S. national debt is $36T, which equates to about $106,000 per American citizen
- Unemployment remains at 4.2%
- Headline inflation (PCE) rose 0.1% month over month and 2.1% year over year in May
- The 10-year US Treasury yield ranged from 4.25 (on 5/1) to a high of 4.58 (on 5/21) in May
Downgrade
Moody’s recent decision to lower the U.S. credit rating from Aaa to Aa1 represents another milestone in America’s evolving fiscal landscape. This downgrade joins similar actions by Fitch in 2023 and Standard & Poor’s in 2011, reflecting mounting concerns about the nation’s debt trajectory. As Washington continues budget negotiations that may expand annual deficits, investors are questioning how these developments affect their portfolios.
Over the past fifteen years, budget standoffs and debt ceiling debates have repeatedly triggered market volatility. Notable examples include the 2011 S&P downgrade, the 2013 fiscal cliff, and government shutdowns in 2018 and 2019. Despite these disruptions, agreements were ultimately reached, allowing markets to stabilize and continue their upward trajectory.
Following the unprecedented 2011 downgrade and subsequent market correction, the S&P 500 achieved full recovery within months. Remarkably, U.S. Treasury securities continue functioning as safe-haven assets during turbulent periods, maintaining their critical role in global financial markets despite rating downgrades.
While fiscal sustainability concerns are legitimate from a citizen’s perspective, overreacting with investment portfolios can prove counterproductive. Markets have consistently recovered from past fiscal challenges, making a disciplined, long-term investment approach focused on diversification and fundamentals more effective than reacting to Washington headlines.
TCJA provisions are positioned for extension or permanent status
Congress is currently developing a comprehensive budget bill to extend individual tax cuts from the 2017 Tax Cuts and Jobs Act, preventing their expiration at 2025’s end. This proactive approach aims to avoid a potential “tax cliff” scenario where rates would revert to pre-TCJA levels, potentially disrupting economic stability.
The proposed tax package includes significant provisions for both individuals and businesses:
Individual provisions include: permanent TCJA tax rates with a 37% top rate, increased child tax credit to $2,500 through 2028, potential SALT deduction cap increases, and tax exemptions for tips and overtime pay.
Business provisions encompass: increased pass-through business deductions from 20% to 23%, reinstated 100% bonus depreciation for qualified assets, and restored research and development tax deductions.
While the proposal includes approximately $1.6 trillion in spending reductions through program modifications, these are overshadowed by tax cuts and increased spending elsewhere. The Congressional Joint Committee on Taxation estimates the debt could increase by $3.7 trillion over the next decade.
With national debt exceeding $36 trillion and most federal spending allocated to mandatory programs like Social Security and Medicare, achieving significant spending cuts remains politically challenging. This reality suggests potential future tax increases despite near-term TCJA extensions.
However, markets have historically performed well across varying debt and deficit levels. Paradoxically, some of the strongest market returns have followed periods of high deficits, as these often coincided with economic crises when markets were at cyclical lows.
Chart of the Month
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The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The market index is unmanaged.
The NASDAQ Composite Index is an unmanaged, market-weighted index of all over the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
Data sources: Clearnomics, YCharts, The Wall Street Journal, Charles Schwab Asset Management, The Economist, Committee for a Responsible Federal Budget, JPMorgan, US Treasury Department, & US Federal Reserve.