Increasing Investor Optimism Meets Fitch Downgrade In recent months, investor optimism has been on the rise. This optimism is driven by the belief that the Federal Reserve will be able to defeat inflation, avoid a recession, and start cutting interest rates. As a result, S&P 500 EPS expectations have improved, and stock prices have risen.
However, this optimism took a hit last week when Fitch downgraded the United States from its AAA rating to AA+. This downgrade was a reminder that the US economy is not as strong as it once was, and that the Fed may not be able to achieve its goals without causing some pain.
The Fitch downgrade has caused a pause in the rally, with the S&P 500 down -2.42% in August. However, we believe that this is just a temporary setback. As S&P 500 EPS expectations continue to improve, stock prices should eventually resume their upward trend.
However, the Fitch downgrade does raise some questions about the cost of easy monetary and fiscal policies. These policies have helped to support the economy during the pandemic, but they have also contributed to rising inflation. If the Fed is forced to tighten monetary policy more aggressively than expected, it could lead to a recession.
Overall, we believe that the long-term trend for the stock market is positive. However, we believe that investors should be prepared for some volatility in the near term. The Fitch downgrade is a reminder that the US economy is not immune to risk, and that the Fed may not be able to achieve its goals without causing some pain.
What Does This Mean for Investors?
Investors should take the following steps in light of the recent developments:
Maintain a diversified portfolio. This will help to reduce your risk if the stock market does experience a correction.
Be patient. The stock market is volatile in the short term, but it tends to trend upwards in the long term.
Stay informed. Monitor the news and economic developments so that you can make informed investment decisions.
We believe that the stock market is still a good investment for the long term. However, investors should be aware of the risks and be prepared for some volatility in the near term.