After Fitch Downgrade, S&P 500 Sees Biggest Daily Drop Since Late April

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on April 19, 2023. (Brendan McDermid/Reuters)

The S&P 500 saw its biggest decline since late April on Wednesday after Fitch Ratings downgraded America’s credit rating from AAA to AA+ amid a “steady deterioration in standards of governance.”

On Wednesday, the S&P 500 index fell by 1.4 percent, its largest daily decline since late April.

The tech-focused NASDAQ index slumped by close to 2.2 percent, which is its biggest daily fall since February.

Among factors that Fitch cited as reasons for downgrading the U.S. credit rating were “a high and growing general government debt burden” and an “expected fiscal deterioration over the next three years.”

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in an Aug. 1 commentary.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

Since the beginning of 2023, the debt limit issue has shaken investor confidence in the strength of the American economy.

In January, Treasury Secretary Janet Yellen warned congressional leaders that the country was close to hitting its $31.4 trillion borrowing limit.

Treasury Secretary Janet Yellen delivers remarks on the Inflation Reduction Act after visiting the site of a new paperless processing initiative in McLean, Virginia, on Aug. 2, 2023. (Stefani Reynolds/AFP via Getty Images)

It wasn’t until the end of May that Democrats and Republicans finally agreed to a debt limit deal, suspending the debt ceiling through Jan. 1, 2025.

Between January and May, multiple attempts were made by the GOP to arrive at a deal with some spending cuts. For instance, on Feb. 6, House Speaker Kevin McCarthy (R-Calif.) pushed for a debt ceiling deal together with spending reforms. “No blank checks for runaway spending,” he said at the time.

However, the Biden administration shied away from making a compromise, with President Joe Biden accusing the Republicans of holding the economy “hostage” over the debt limit during his State of the Union address on Feb. 7.

Eventually, the debt ceiling deal agreed upon by both parties in May ended up containing reduced spending as the GOP had always been pushing for.

In its commentary, Fitch cited America’s growing debt as a major problem.

“In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade.”

The United States’ national debt stood at $20.61 trillion in fiscal year 2012. By fiscal year 2022, this had risen to $30.93 trillion; an increase of over 50 percent. Over the last two decades, national debt has surged by 200 percent.

Downgrade May Hurt Everyday Americans

Fitch’s downgrade essentially means that interest rates on government debt could see a strong upward move. Such a situation would put the finances of everyday Americans under stress.

As lenders demand high interest rates, consumers will have to shell out more in borrowing costs for mortgages, credit cards, auto loans, and other forms of debt. As people spend more to meet their borrowing costs, they can end up spending less on buying goods and services.

With consumer spending dropping, business revenues can take a hit, which could trigger an increase in unemployment.

Many businesses may also shut down owing to the burden of higher interest rates amid an uncertain economy. Stock prices could fall massively, erasing the savings of numerous investors and the savings of American citizens.

Bankruptcies have been rising among businesses, with corporate bankruptcies reaching their highest first-half levels since 2010. As for small businesses, bankruptcy filings, categorized as Subchapter V elections within Chapter 11, jumped 55 percent.

The downgrade “reinforces our view that rising inflation and debt burdens will prompt investors, over time, to demand more … compensation for the risk of holding long-term government debt,” strategists at BlackRock Investment said, according to Reuters.

Failing Bidenomics?

The Fitch downgrade comes as the president is touting his “Bidenomics” as a path to improve the American economy and resolve issues like inflation and unemployment.

However, not many Americans have expressed faith in “Bidenomics.” A July poll by Monmouth University found that only three in 10 U.S. citizens thought the country’s economy is improving.

In June, job openings had fallen to their lowest level in more than two years. By June-end, there were 9.582 million job openings, the lowest since April 2021.

White House press secretary Karine Jean-Pierre speaks during a press briefing at the White House in Washington on July 28, 2023. (Madalina Vasiliu/The Epoch Times)

The Biden administration has blamed former President Donald Trump for the Fitch downgrade.

“We strongly disagree with this decision,” White House press secretary Karine Jean-Pierre said in a statement following the Fitch decision.

“The rating model used by Fitch declined under President Trump and then improved under President Biden, and it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” she said.

In an Aug. 3 tweet following the downgrade, Sen. Tim Scott (R-S.C.) criticized the federal government’s economic policies.

“The Biden Administration wants America to believe what they say, not what Americans see. Instead of an apology, they offer nothing but excuses for crippling Bidenflation that now taints America’s standing on a global stage,” he said.

“This downgrade is a direct result of Joe Biden’s disastrous economic policies,” Georgia Republican Gov. Brian Kemp said in a tweet.

“Thanks to responsible, conservative leadership over the last two decades, Georgia’s AAA rating is now higher than the nation’s,” he added.