Monday, April 18, 2011

Markets Hit as S&P Downgrades U.S. Long Term Fiscal Outlook to Negative, Warns of Potential Loss of AAA Rating in 2 Years

U.S. premarket futures were down this morning on more hand wringing over sovereign debt issues in Europe.  However just after 9 AM, a surprise came in the form of the S&P rating agency which backhanded the U.S. in the form of a downgrade of the long term fiscal outlook.

Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.

Further, they stated there is a 1 in 3 chance the U.S. could lose its AAA status in two years.  

We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013,” New York-based S&P said in a report today. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

While none of these things should be a surprise to anyone with a pulse, the shock value seems to have hit investors.  Obviously the combination of tax cuts + spending increases = kicking the can down the road has been awesome in terms of filling our veins with steroids but eventually will come home to roost.

The S&P 500 has fallen to the 1300 level, and is now firmly below the S&P 1307 level I've been citing the past few weeks.

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