Standard & Poor’ decision late Friday to downgrade the United States’ credit rating sparked fear and many questions: Would stocks tank, first in Asia Sunday night and then in New York Monday morning? Would interest rates on U.S. Treasuries spike higher?
Consensus from economists and investment strategists built quickly that while there could be an initial shock, the downgrade itself should not impact markets too much.
“S&P doesn’t know anything that investors don’t already know, so the downgrade should not change expectations and interest rates,” said Martin Feldstein, Harvard economist and former head of the National Bureau of Economic Research.
Still, the relative optimism came with a big, fat caveat: It is unprecedented for the U.S. to not have a AAA credit rating.
“We’ve never been through this before. People don’t know what to expect,” said Ted Weisberg of Seaport Securities, who has spent decades on the floor of the New York Stock Exchange. “So you have to be careful.”
And besides, even if investors shrug off the downgrade, there are plenty of other issues that could weigh on markets.
“The initial reaction when the financial markets open on Monday could be severe,” wrote Paul Dales of Capital Economics in a note after the downgrade. “Overall, though, we think that any adverse market reaction will be temporary. Once the dust settles, attention will turn back to the economic fundamentals.”
Those weak economic fundamentals contributed to the worst week for stocks since the 2008 financial crisis and a sharp drop in Treasury yields.