Fitch downgraded US debt to AA+ from AAA a couple of weeks back. Fitch said the downgrade was due to an “erosion of governance” in the US compared to other top-tier economies over the last two decades. The Biden administration and many “experts” said the downgrade was undeserved and nonsense. Treasury Secretary Yellen said, “The change by Fitch Ratings announced today is arbitrary and based on outdated data.” But in all seriousness, who can argue with the downgrade?
Look what is going on in this country:
- For the first time in our history, we did not have a peaceful transfer of power after the 2020 election.
- The last President has been indicted multiple times and still insists the last election was stolen, and many people actually believe him.
- We have gone to the brink several times when renewing the debt limit.
- Trump added $6.7 trillion in debt from fiscal year 2017 to fiscal year 2020, an increase in the national debt of 33% in four years. At the end of fiscal year 2020, the national debt was $26.9 trillion.
- Under Biden, in January of 2023, the national debt hit $31.4 trillion.
- The cost of refinancing the debt at higher interest rates is going to compound the problem.
- Spending is just out of control, and hardly anyone cares.
So the downgrade was well deserved and should probably have been deeper.
It was another big week for stocks as US markets advanced by 2.71% and a super strong 3.91% outside the US. Bonds were up 1.46% as interest fell on a good inflation report.
The market appears to be broadening out, the equal-weighted S&P 500 has doubled the S&P 500 performance over the last six weeks, 6% v 3%. The S&P 500 trades at 18.9x earnings, but when you back out the seven leaders (that trade at 40x), the index trades at 15x. Meanwhile, quarterly earnings are expected to drop for the third quarter.
The market appears overbought. 83% of S&P 500 stocks are above their 20-day exponential moving average, 82% are above the 50-day, and 71% are above the 200 day. Two of the last times stocks were at similar metrics, greater than 80/80/70, led to sell-offs. From February 1, 2023, to March 13, the market fell by 6.4%. Prior to that, the other time was at the end of 2021, which turned out to be the last peak of the S&P 500. The market would fall by about 25% over the next ten months.